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This Dividend King Beat Earnings Estimates; Is It a Buy?

By Courtney Carlsen – Updated Aug 19, 2021 at 11:38AM

Key Points

  • Cincinnati Financial posted another quarter of growing premiums.
  • The company has steadily increased premiums for decades now, and that's why it is part of the Dividend Kings club.
  • The insurer is positioned well to weather the current economic backdrop.

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Total revenue declined year-over-year, but this company's core business continues to produce.

If you were to just look at year-over-year comparisons for Cincinnati Financial's (CINF 0.69%) recent earnings, you would see a company with both revenue and net income declining from the same quarter last year. However, you would be missing the bigger picture, as the company posted good earnings growth on its core business -- underwriting insurance policies.

Once again, Cincinnati Financial saw another solid quarter of premium growth, and that's a big reason why it's a Dividend King stock -- an exclusive list of companies that have increased dividends for 50 years or more. In fact, the insurer has increased its dividend payout for 61 years straight; only eight other S&P 500 companies have a longer streak. Let's dig in.

Earnings are not quite what they seem

Cincinnati Financial is a property and casualty insurer headquartered in Ohio. It makes money underwriting a variety of insurance policies and uses excess proceeds to invest in stocks and bonds. Over 60% of the company's written premiums come from its commercial lines of insurance -- or insurance coverage to businesses for things like auto, property, and worker's compensation. Another 26% of its written premiums come from personal lines of insurance, including homeowner's and auto insurance.  

Insurance agent meets with two people.

Image source: Getty Images.

On the surface, Cincinnati Financial seems to have had a disappointing quarter, as total revenue decreased 15% from the same quarter last year to $2.3 billion. This flowed down to the bottom line, as diluted earnings per share (EPS) came in at $4.31, down 23% from last year.  

Its core business performed well

Investors in Cincinnati Financial shouldn't sweat it, for a couple of reasons. For one, the insurer's core business performed quite well. In the most recent quarter, the company posted strong core earnings -- with core earnings being its premium revenue -- that beat estimates, with core EPS growth coming in at $1.79, well above analysts' estimates of $0.99.  

The company's total revenue was affected by large fluctuations in its investment gains from last year to this year. In the second quarter last year, the company saw a $1 billion unrealized gain on its equity portfolio, as the stock market bounced back with vigor following a sharp sell-off in March 2020. In this recent quarter, the company saw unrealized gains of $520 million. 

Second, the company has been stellar in the first half of 2021. Earned premiums are up nearly 7% to $2.9 billion, while total revenue is up 73% to $4.5 billion. Insurance losses have come down 8% from last year. As a result, diluted EPS for the first six months is at $8.13, a drastic improvement from its diluted loss per share of $1.96 last year.

A Dividend King with a long history of increasing payouts

Cincinnati Financial has certainly earned its title of Dividend King, increasing its dividend year after year as a result of steady premium growth and good capital management skills.

The company yields investors a solid 2.05% at Thursday's prices. Consistent earnings growth is a big reason why the insurer has achieved Dividend King status. Since 1997, the insurer has grown premiums at a 6.1% compound annual growth rate. Over the past five years, the insurer has increased its premiums earned at a steady growth rate of 6%. Talk about consistency.  

Another good sign that Cincinnati Financial will be able to maintain its Dividend King status is its 13.5% payout ratio. Payout ratio is simply the dividend payments divided by the company's earnings. This ratio can be a good indicator of how sustainable a company's dividend payment is, with a lower ratio meaning a more sustainable dividend payment.  

Positioned well for many market environments -- especially the current one

Cincinnati Financial is positioned well for an environment where inflation could be here to stay. Insurance companies can be good hedges against inflation for a couple of reasons.

First, inflationary environments can lead to the Federal Reserve raising its benchmark federal funds rate, which brings up interest rates on U.S. Treasuries and corporate debt. Because insurance companies invest excess funds in the market until claims are paid out, they stand to benefit from rising interest rates. Second, insurance companies can respond relatively quickly to rising prices. Insurers get feedback through the claims process and can quickly see the rising costs of materials and labor; from that, they can adjust premiums charged to customers in response.

Cincinnati Financial is one company that has strong pricing power, as seen by its ability to raise prices and increase premiums steadily across a variety of market environments over the past two decades. The insurer is positioned well for the current economic backdrop, and its history of consistent earnings growth makes it a solid dividend stock for investors.

Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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