Company Description: Cincinnati Financial Corp. markets primarily property and casualty coverage; it also conducts life insurance and asset management operations.
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
CINF is trading at a discount to 1.), 2.) and 4.) above. The stock is trading at a 17.2% discount to its calculated fair value of $30.77. CINF earned a Star in this section since it is trading at a fair value.
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%
CINF earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt-to-Total Capital being less than 45% and it earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1954 and has increased its dividend payments for 49 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
CINF earned a Star in this section for its NPV MMA Diff. of the $921. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as CINF has. The stock’s current yield of 6.16% exceeds the 3.72% estimated 20-year average MMA rate.
Other: CINF is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.
Conclusion: CINF earned one Star in the Fair Value section, earned two 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 CINF as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $30.77 before CINF’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 49 years of consecutive dividend increases. At that price the stock would yield 5.10%.
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 negative (1.5%). This dividend growth rate is slightly less than the 0.6% used in this analysis, thus providing a very small margin of safety. CINF has a risk rating of 1.75 which classifies it as a medium risk stock.
CINF was founded by independent insurance agents in order to better service their needs by providing them preferential treatment when picking an underwriter. The company primarily sells commercial property-casualty insurance with a smaller personal lines exposure marketed through a select group of about 1,100 independent insurance agencies.
Like most financial services companies, CINF has seen its share of struggles. Although, the stock is trading slightly below my buy price of $30.77, its Free Cash Flow payout of 78% gives me pause. Before seriously considering initiating a position in this stock, I plan to wait a few more quarters watch for a decline in the FCF Payout. 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 CINF (0.0% of my Income Portfolio). What are your thoughts on CINF?
This article originally appeared on The DIV-Net December 7, 2009.