The last time I wrote about Cincinnati Financial Corporation (NASDAQ:CINF) I stated, "I'm going to take another pass on this stock right now and evaluate again after earnings." Since it is time for my quarterly portfolio change-out I decided to sell Cincinnati Financial out of the portfolio and replace it with MetLife Incorporated (NYSE:MET) because I believe MetLife has a lot more upside to it than Cincinnati Financial. Cincinnati Financial is engaged in property casualty insurance marketed through independent insurance agents in 39 states. On October 24, 2013, Cincinnati Financial reported third quarter earnings of $0.79 per share, which beat the consensus of analysts' estimates by $0.17. In the past year the company's stock is up 31.32% excluding dividends (up 33.96% including dividends), and is beating the S&P 500, which has gained 28.25% 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 show why I sold Cincinnati Financial out of the financial sector of my dividend portfolio.
The company currently trades at a trailing 12-month P/E ratio of 14.87, 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 one-year forward-looking P/E ratio of 19.69 is currently fairly priced for the future in terms of the right here, right now. The forward P/E value that is higher than the trailing twelve month P/E value tells us the story of earnings contraction in the next year. Next year's estimated earnings are $2.69 per share while the trailing twelve month earnings per share were $3.56. Below is a comparison table of the fundamentals metrics for the company from the time I wrote the last article to what it is right now.
EPS Next YR ($)
Target Price ($)
EPS next YR (%)
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 3.17% with a payout ratio of 47% of trailing 12-month earnings while sporting return on assets, equity and investment values of 3.5%, 10.3% and 6.6%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 3.17% yield of this company 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 at a 5-year dividend growth rate of 2.9%. Below is a comparison table of the financial metrics for the company from the time I wrote the last article to what it is right now.
Payout TTM (%)
(click to enlarge)Looking first at the relative strength index chart (RSI) at the top, I see the stock muddling around in overbought territory with a value of 74.97. To confirm the stock is overbought, 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 flattening out in height, indicating the bullish pattern getting tired. As for the stock price itself ($52.95), I'm looking at $53.32 to act as resistance and $51.68 to act as support for a risk/reward ratio, which plays out to be -2.4% to 0.7%.
- The company declared a quarterly dividend of $0.42 per share with an ex-date of 16Dec13 and pay date of 15Jan14.
- On 24Oct13 the company reported third quarter earnings of $0.79 per share on revenue of $1.15 billion versus expectations of $0.62 per share and $1.12 billion.
- The revenue value was up 11% from the previous year while book value of $35.51 was up 6.1% year to date. A very helpful impact to the numbers was the fact that underwriting profit swung to a $173 million gain in the first nine months of this year as opposed to the $23 million loss from the same period in 2012.
These are two different types of insurance companies with MetLife operating more on the life insurance side and Cincinnati Financial operating on the property and casualty insurance side of things. Fundamentally I believe Cincinnati Financial to be fairly valued based on future earnings, but I also feel that it can drop in price dramatically based on those earnings because they are expected to contract in the next year. Financially I'm giving up quite a bit of dividend but I believe it is okay because I like the capital appreciation opportunity much better with MetLife opposed to the depreciation I expect to take place with Cincinnati Financial. On a technical basis Cincinnati Financial is overbought and should be seeing a dip very soon. Next year's earnings contraction expectation is the main reason I sold Cincinnati Financial out of my dividend portfolio and I will provide reports on how each is doing against each other as the future progresses.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!