Most investors know just how great of a stock Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) has been over the last five-plus decades. Led by legendary investor Warren Buffett, who at 92 years old still runs the company, the stock has soundly beaten the market in just about every year since 1965. 2022 is one of these years where Berkshire stock is showing its prowess, easily outperforming the struggling S&P 500, which first entered bear market territory in June.
Given Berkshire's past success, I think most investors would agree that any stock that operates similarly to it is worth a look. Here's one such stock you might want to consider. It also happens to be a Dividend King.
Image source: Motley Fool.
A similar business model
Over time, Berkshire Hathaway grew into one of the largest conglomerates in the world, acquiring and then running large businesses in a lot of different sectors, from mortgages to railroads to energy. But at its core, Berkshire is an insurance company that invests a large portion of its premiums and cash into its large, roughly $318 billion equities portfolio.
A stock with a somewhat similar business model is property and casualty insurer Cincinnati Financial (CINF -1.23%). A lot of insurance firms invest most of their liquidity into bonds because you need to keep liquid sources of assets in case the insurance firm has to pay out claims. Stocks are plenty liquid but also tend to move more in line with the broader market, so if there is a down year similar to this one, their value may fall more (not that bonds aren't struggling this year).
At the end of the third quarter, Cincinnati Financial had about 39% of its invested assets in stocks across many sectors, including financials, pharmaceuticals, consumer goods, and even some tech companies. Roughly 55% of its invested assets are in fixed-income assets, largely in corporate and municipal bonds.
A Dividend King
Unlike Berkshire Hathaway, which doesn't pay a dividend, Cincinnati Financial not only pays a dividend but is really one of the most consistent generators of passive income in the stock market.
The company is a Dividend King, meaning it's in the S&P 500 and has paid out a dividend and raised that dividend for at least 50 consecutive years. In fact, Cincinnati Financial has increased its dividend for an amazing 61 straight years. Cincinnati Financial currently has an annual dividend yield of 2.7%, which isn't the highest yield in the world but is still quite healthy.
While the company has struggled this year due to volatile market conditions, higher loss expenses, and inflation, Cincinnati Financial still managed to increase its dividend by about 9.5% this year. Furthermore, despite reporting losses this year, the company is still generating enough operating cash flow to cover its dividend.
Is Cincinnati Financial a buy?
Companies holding a large portfolio of stocks and fixed-income assets struggled this year because rising interest rates led to a big decline in bond values, and because stocks are largely down this year. Through the first nine months of the year, Cincinnati Financial saw close to $3 billion of losses on these portfolios. However, these are only paper losses and are likely to recover if and when stocks and bonds regain their value in the inevitable bull market still to come.
Furthermore, Cincinnati has also seen loss expenses rise due to inflationary pressure and events like Hurricane Ian, which pushed Cincinnati's combined ratio close to 104%. The combined ratio looks at an insurance firm's loss expenses over earned premiums, so if the ratio is over 100, that means losses are exceeding premiums.
The good news is inflation looks to have peaked, and Cincinnati has been able to increase premium prices recently, which should help the company's core insurance business next year. While the future for stocks and bonds is still murky, these portfolios in the long term should be able to bounce back and enhance shareholder value.
And with a rock-solid dividend that management has grown over the last six-plus decades, I think Cincinnati Financial is a buy.
