Travelers (NYSE:TRV) is an insurance giant that typically turns a profit, and likes to pay out part of those earnings in the form of a dividend to its shareholders. Somewhat unusually for the insurance sector, that dividend is fairly rich, with the current $0.61 payout yielding 2.4% on the most recent closing stock price. That easily beats the yields from rivals American International Group and W.R. Berkley, to name but two.
That relatively big payout is one of the key factors attracting investors to the stock. Travelers would become that much prettier in the eyes of those investors if it were to lift that dividend -- and sooner, rather than later. Let's determine the likelihood of that happening this year.
April showers bring...
Sheer force of habit bodes well for that possibility. Since the beginning of this decade, the company has declared a dividend raise once every year in April. It even managed to add a few cents to it during the financial crisis, no easy feat as this was a notoriously challenging period in which to operate.
This decade's raises have generally been substantial, usually in the low double-digit percentages. Averaged together, they have slightly exceeded 10%.
That differs from the payout tendencies of its peers. American International Group, one of the hardest-hit companies during the crisis, suspended its quarterly dividend for over five years because it was basically in survival mode. It's been sprinting to catch up since then, however, with the payout rising to the present $0.28 per share from the initial relaunch level of $0.10.
W.R. Berkley has been more consistent, managing to squeeze out its modest dividend every quarter for many years now, even through the crisis. The company is a frequent raiser but not particularly generous about it, typically adding $0.01 to the regular payout every year or so. Since a 2005 3-for-2 stock split, W.R. Berkley's dividend has crawled upwards from $0.04 per share to the present $0.11.
Habit is all well and good, but of course there needs to be enough money in the coffers in order to make a payout.
Does Travelers have the cash to distribute?
It's a consistently profitable company, if not exactly a hotly growing one. Its business has been steady over the past few years, with annual revenue coming in at a fairly narrow range of $25.5 billion to nearly $27.2 billion since 2011. Meanwhile, net income has improved vastly over that stretch, from 2011's $1.4 billion to last year's $3.4 billion. Annual net written premiums are inching close to $6 billion.
This performance has kept operating cash flow up well over $3 billion, and since the company has had basically no capital expenditures to speak of, its free cash flow figure is similar. It also happens to be nearly, or just over, five times what Travelers has paid out in dividends in the preceding three fiscal years. In other words, it's well within the company's financial means.
Keep 'em coming
Travelers is a company that basically spends its free cash on dividends and stock buybacks. As it's made sure to keep adding to the payout, and at a regular intervals, it's clear that the former is very important to the company.
So, barring any major disaster this year that would affect its finances (winter storm Jonas, although disruptive, doesn't qualify), we can count on Travelers raising its distribution again once April rolls around. Established habits die hard -- especially for companies that are willing and determined to maintain them.
Eric Volkman has no position in any stocks mentioned. Nor does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.