When forming a long-term stock portfolio, one wants to be as diversified as possible. The problem is, when trying to find exposure to any aspect of the financial sector, it is very difficult to find choices that still offer a dividend to make holding the stock worthwhile. During the recent financial crisis, many firms were left with no choice but to reduce or even eliminate their dividend. However, insurance companies offer great exposure to the financial sector, while still having a solid dividend history to give long-term investors peace of mind. In fact, out of the three major insurance companies profiled here there has been only one dividend cut in the past 10 years, and that took place in 2009.
There are also very nice growth opportunities in the insurance sector, mostly having to do with international expansion. My favorite companies in the sector in no particular order are:
- Aflac Inc. (AFL) - What most consumers don't realize is that 80% of Aflac's business comes from Japan, where it is the number one life insurance company. In the U.S., Aflac is the number one provider of voluntary worksite insurance, and its policies pay cash benefits directly to the insured. One of my favorite things about Aflac as an investment is that the company has one of the best records of dividend increases I have ever come across, with 29 consecutive years of increases. Currently yielding $1.40 annually, or 2.68%, it is a fairly safe assumption that the increases will continue going forward. Also worth noting is that Aflac trades at only 8.2 times 2012 earnings, which are expected to grow considerably going forward. Consensus estimates call for earnings of $6.92 and $7.38 in 2013 and 2014, respectively. Conservatively assuming the P/E ratio gravitates toward the historic average of around 9 times earnings, this gives us one and two year price targets of $62.28 and $66.42.
- MetLife Inc. (MET) - The largest U.S. life insurer, MetLife also has a substantial financial services business, with a focus on retirement planning and corporate benefit funding. The company also has a rapidly growing international business, currently comprising 31% of revenues. Currently yielding 2.3%, MetLife has a solid record of raising the dividend; however they have kept the payout constant since the financial crisis. My favorite thing about MET is its extremely attractive valuation, currently trading at only 6.7 times earnings. The failure of the Fed's stress test could be the reason for the depressed valuation, but analysts tend to believe that MET is financially sound and is well positioned to capture additional market share.
- Prudential Financial, Inc. (PRU) - A diversified financial services company, Prudential derives 72% of its revenues from insurance and 28% from retirement solutions and investment management. Prudential is the highest yielder of the three companies profiled here with a 3.0% payout, which has been raised 9 years out of the past decade. The company also has the best growth prospects of the three, and it currently trades at 9.1 times 2012's consensus earnings of $6.15 per share. Earnings of $7.93 and $8.80 are expected for the next two years, meaning that the company is projected to grow its earnings by 43% over the next two years. Assuming the same P/E multiple, which I find to be very low considering the amount of growth expected, this gives me price targets of $72.16 and $80.08 for one and two year timeframes.
In conclusion, companies such as these are a great way to get exposure to the insurance sector, while still earning income and possibly growing share price significantly over time. All three of these companies are very fairly valued, and are financially well-positioned. They all have their own strong points as well: Aflac for international exposure in your portfolio and an unbeatable history of dividend increases, MetLife for its extremely cheap valuation, and Prudential for its high yield and growth potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.