Cincinnati Financial Corporation (CINF) is engaged in property casualty insurance marketed through independent insurance agents in 39 states. On July 25, 2013, the company reported second quarter earnings of $0.66 per share, which beat the consensus of analysts' estimates by $0.24. Since last writing about the company on June 11, 2013, the stock is up 1.53% excluding dividends (up 3.3% including dividends), and is losing to the S&P 500, which has gained 5.03% in the same time frame. With all this in mind I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if it's worth buying shares of the company right now for the financial sector of my dividend growth portfolio.
Cincinnati Financial currently trades at a trailing 12-month P/E ratio of 13.68, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 19.64 is currently expensively priced for the future in terms of the right here, right now. The forward P/E value which is much higher than the trailing twelve month P/E value tells us the story that there is a reduction in estimated earnings next year. Next year's estimated earnings are $2.40/share while the trailing twelve month earnings per share were $3.45.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. Cincinnati Financial pays a dividend of 3.56% with a payout ratio of 48.7% of trailing 12-month earnings (or 76% of free cash flow) while sporting return on assets, equity and investment values of 3.4%, 10.2% and 6.6%, respectively, which are all respectable values but nothing to go writing home about. Because I believe the market may get a bit choppy here with the debt ceiling looming again I like a safety play and I believe a 3.56% yield is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 53 years with a 5-year dividend growth rate of 2.9%.
Looking first at the relative strength index chart (RSI) at the top, I see the stock muddling around near middle ground territory with a value of 57.47 with upward trajectory, which is a bullish pattern. To confirm that, I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is above the red line with the divergence bars increasing in height, indicating the stock has upward momentum. As for the stock price itself ($47.20), I see the 50-day moving average acting as resistance right now and I would look at $46.63 to act as support for a risk/reward ratio, which plays out to be -1.2% to 0.66%.
- The company declared a quarterly dividend of $0.42 per share with an ex-date of 16Sep13 and pay date of 15Oct13. The $0.42 dividend is an increase from the prior dividend of $0.4075 and is a 3.06% increase.
- The company reported second quarter earnings of $0.66 per share which beat analysts' average estimates by $0.24 per share. Revenue of $1.1 billion however missed the estimates by 1%. Operating income of $0.61 per share was up from the $0.17 per share reported a year ago. Book value per share was $34.83 which was up 10% from a year ago, but down 1.6% from the first quarter results due to rising interest rates hitting the bond portfolio. The company stated that it has built several advantages that should help soften the negative impact of rising interest rates, so we will have to see if those advantages paid off when the company reports third quarter results on 21Oct13.
The company is fairly valued based on future earnings but is expected to have negative future growth prospects (one-year outlook) due to rising interest rates. Financially, the dividend payout ratio is middle of the road based on trailing 12-month earnings and I don't doubt management will be able to continue to increase the dividend going forward; based on future earnings the dividend payout ratio goes up to around 70% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some upward movement in the immediate future. The future earnings contraction, rising interest rates and the looming debt ceiling debate are things I don't like about the company currently. Back in June I bought the stock based on the housing and auto recovery, thinking that more people will be insuring their property with the company, making it good for top-line growth. The thesis has now changed with the macroeconomic winds whirling. Personally I'm not going to buy any positions right here because I want to see how its bond portfolio performed during the summer when interest rates were hitting 3% when the company reports in October. I will try to do another analysis after the company reports to see if it's safe to board the ship again or jump ship.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!