Investors have had a lot to consider in recent years. When the pandemic emerged in early 2020, central banks and federal governments spent trillions of dollars to fight a possible economic collapse. This fueled a massive bull market across all asset classes. However, this spending and other geopolitical issues have stoked the flames of inflation, which is now at the forefront of investors' minds. Inflation causes uncertainty about the economy and can make for a tricky investment environment.
As investors, one thing we can do is buy companies with pricing power and strong cash flows. Chubb (CB 1.51%), the global property & casualty insurer (P&C), is one company that fits the bill.
Image source: Getty Images.
1. Insurance will always be in demand
During inflationary times, businesses and consumers cut costs where they can. However, insurance is one place where you can't skimp. That's because forces in place require individuals and companies to carry insurance policies.
For example, regulations require car owners to carry an insurance policy to protect themselves and others. Companies need insurance policies to cover the specific risks related to the particular industry to protect both the company and its employees.
Chubb writes a range of insurance policies, including workers' compensation, cybersecurity, professional liability, and personal automotive insurance. Chubb's focus on a variety of insurance policies is a big reason why its one of the largest insurers in the world.
Data source: NAIC. Chart by author.
2. Chubb is a money-making machine
Insurance companies can be cash cows, which is why Warren Buffett loves the industry. Insurers make sales up front, collecting your premium payment at the beginning of your policy period. Insurers then provide you with the product or service only after you file a claim. As a result, insurers sit on a mound of cash, called float, between your premium payment and the insurer's payment of your claim.
This float can be put to work in short-term investments to generate extra returns for the insurance company. If customer claims are less than premiums collected during a period, insurers keep that extra cash and can use it to build up an investment portfolio for added returns. This makes the best insurers cash flow machines.
Free cash flow (FCF) is one measure that tells you how much cash a company generates after paying for its necessary operating costs. Whatever's left can pay down debt or return to shareholders through dividends and stock buybacks. Last year, Chubb's FCF was $11.5 billion, and it has averaged $4.75 billion over the previous 20 years.
CB Free Cash Flow data by YCharts
3. Chubb consistently writes profitable policies
Insurance companies must balance risks and rewards on the policies they write. The best companies in the industry take in more money in premiums than they pay out in claims costs. One way to measure this is the combined ratio: losses plus expenses, divided by total earned premiums. Anything below 100% is desirable, and the lower the percentage, the better.
Chubb has done a stellar job of underwriting profitable policies. From 2002 through 2020, Chubb's combined ratio of 91.8% is far below the industry average of 99.7%.
Data source: Chubb 10-K Filings, Statista for P&C Industry data. Chart by author.
4. 29 years of consistent dividend increases
Chubb's ability to underwrite profitable policies has put it in a strong capital position, helping the company achieve Dividend Aristocrat status -- a select club of companies in the S&P 500 that have increased dividends for 25 years or more. The insurer has increased payouts for 29 straight years and currently yields investors 1.56% annually.
CB Dividend Yield data by YCharts
Payout ratio is a useful metric for dividend stocks, showing the percentage of a company's earnings that it spends paying dividends to stockholders. Chubb's payout ratio has averaged 30% over the last decade, and was a meager 17% last year, a positive sign that the company can maintain that dividend, or even increase it, as long as the company continues to write good policies.
Given the uncertain economic times, Chubb looks like a stellar dividend stock you can include as part of a diversified portfolio.
