The Travelers Companies, Inc. (NYSE:TRV) is engaged in providing a range of commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals. On July 23, 2013, the company reported second quarter earnings of $2.13 per share, which beat the consensus of analysts' estimates by $0.53. Since last writing about the company on June 4, 2013, the stock is up 3.75% excluding dividends (up 4.98% including dividends), and is losing to the S&P 500, which has gained 4.99% 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.
The company currently trades at a trailing 12-month P/E ratio of 11.23, 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 11 is currently inexpensively priced on the future in terms of the right here, right now. Next year's estimated earnings are $7.90 per share and I'd consider the stock inexpensive until about $119.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.3% with a payout ratio of 25.84% of trailing 12-month earnings (or 30.84% of free cash flow) while sporting return on assets, equity and investment values of 2.9%, 11.7% and 7.8%, 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 but I believe the 2.3% yield is not good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 9 years with a 5-year dividend growth rate of 9.6%.
Looking first at the relative strength index chart (RSI) at the top, I see the stock is in overbought territory with a value of 76.28 and 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 ($86.90), it is trading at all-time highs and I would say $91 acts as resistance right now and I would look at $86.37 to act as support for a risk/reward ratio, which plays out to be -0.6% to 5%.
- FBR Capital upgraded the stock to a "buy" on 19Sep13 citing relative valuation, continued price increases, reserve releases, excess capital, and buybacks. The company also raised its price target from $84 to $94.
- Guggenheim initiated coverage on the stock on 18Sep13 starting the company at a "hold" rating.
- Sandler O'Neill maintained its buy rating on the stock back on 24Jul13, but cut the price target from $97 to $92.
Travelers is inexpensively valued based on future earnings. Financially, the dividend payout ratio is very low based on trailing 12-month earnings and free cash flow. I don't doubt management will be able to continue to increase the dividend going forward and at double digit clips. Based on future earnings the dividend payout ratio goes down to around 25.3% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some downward pressure in the immediate future strictly based on the stock being overbought. The inexpensive valuation, double digit dividend growth rate potential, and low dividend payout ratios are what I like about the company. Personally I'm going to layer a small position right here only because I believe I can get it at a cheaper price very soon
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!