Here is a look at how Travelers Companies (TRV) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor - must pass all 6 of the following tests: Score = 5/6
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Calculator):
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$96|
|Value Based on 0% Growth||$56|
|Market Implied Growth Rate||2.33%|
Balance Sheet - 9/30/2013
Earnings Per Share - Diluted
Earnings Per Share - Modern Graham
As a financial or insurance company, Travelers is subject to some minor changes to the initial requirements for Defensive or Enterprising Investors. The requirements utilizing the current assets and current liabilities have been eliminated in order to allow investors to use readily available information, and those items are not expressly listed in the balance sheets for financial and insurance companies. With that in mind, such a company must pass all of the requirements for either type of investor and Travelers does not pass all of the requirements for Defensive Investors because it has not paid a dividend for at least ten years. However, the Enterprising Investor only requires the company currently pay a dividend, so Travelers may be suitable for Enterprising Investors.
From a valuation standpoint, Travelers appears to be fairly valued. Earnings growth has been uneven, but is definitely present, having grown EPSmg (normalized earnings) from $5.11 in 2008 to an estimated $6.62 in 2013. This growth is healthy and leads to a value that is within the margin of safety of where the company is trading today. As a result, Enterprising Investors should feel comfortable moving forward with determining whether Travelers is the right fit for the individual investor at this time, after considering the 7 Key Tips to Value Investing.
Disclaimer: The author did not hold a position in Travelers at the time of publication and had no intention of purchasing a position in the next 72 hours.