Company Description: RLI Corp, based in Peoria, IL, provides selected property, casualty and surety insurance.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
RLI is trading at a discount to only 1.) above. The stock is trading at a 23.2% premium to its calculated fair value of $40.26. RLI did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
RLI earned three Stars in this section for 1.), 2.) and 3.) above. One Star was earned for a Free Cash Flow payout ratio was less than 60% and not having any negative Free Cash Flows over the last 10 years. The stock earned another Star as a result of its most recent Debt to Total Capital being less than 45%. RLI earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. RLI has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 35 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
RLI earned a Star in this section for its NPV MMA Diff. of the $2,796. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as RLI has. If RLI grows its dividend at 15.0% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.82%.
Other: RLI is a member of the Broad Dividend Achievers™ Index. 442 institutions own 79.2% of the 20 million common shares outstanding. This is higher than the average institutional ownership of the Insurance (Prop. & Casualty) Industry at 65.4%. In the last 6 months, there have been 8 insider purchases for a total of 2,000 shares, and there has been 1 insider sale of 9,000 shares.
Conclusion: RLI did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks RLI as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $88.72 before RLI’s NPV MMA Differential fell to the $500 that I like to see for a stock with 35 consecutive years of dividend increases. At that price the stock would yield 1.19%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 9.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. RLI has a risk rating of 2.00 which classifies it as a medium risk stock.
What is better than a company that raises its dividend every year? A company that raises its dividend twice a year, and that is what RLI has done since 2003. RLI is a well-managed company with a strong balance sheet. Two things keep me from purchasing RLI 1.) The company’s current yield at 2.14% is below the 3% minimum I look for and 2.) RLI is trading well above its buy price of $40.26. I will continue to watch the stock for a more favorable entry point. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in RLI (0.0% of my Income Portfolio).
What are your thoughts on RLI?
This article originally appeared on The DIV-Net August 3, 2009.