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Summary

  • Earnings contraction for 2015 concerns me.
  • The company should be raising its dividend next quarter.
  • Financial efficiency ratios increased last quarter.

The last time I wrote about The Travelers Companies, Inc. (NYSE:TRV) I stated, "On a technical basis I'd expect the stock to trend upwards for the short term and for these reasons I will be buying a small batch in the stock right now." Since the time the article was published the stock dropped 5.28% versus the 3.2% gain the S&P 500 (NYSEARCA:SPY) posted. The stock actually did pop as I expected, but dropped thereafter. Travelers 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 January 21, 2014, the company reported fourth quarter earnings of $2.70 per share, which beat the consensus of analysts' estimates by $0.54. In the past year the company's stock is up 1.82% excluding dividends (up 4.2% including dividends), and is losing to the S&P 500, which has gained 19.58% 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 more shares of the company right now for the financial sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 8.6, 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 9.64 is currently inexpensively 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 $8.69 per share while the trailing twelve month earnings per share were $9.74. Next year's estimated earnings are $8.69 per share and I'd consider the stock inexpensive until about $130. The 1-year PEG ratio (1.72), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 5%. Below is a comparison table of the fundamentals metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

My Target Price ($)

PEG

EPS next YR (%)

20Sep13

86.90

11.23

11

7.90

119

N/A

N/A

09Dec13

88.45

11.30

10.87

8.14

122

N/A

N/A

22Mar14

83.78

8.60

9.64

8.69

130

1.72

5.00

Financials

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 2.39% with a payout ratio of 21% of trailing 12-month earnings while sporting return on assets, equity and investment values of 3.5%, 14.6% and 13%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.39% 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 9 years at a 5-year dividend growth rate of 10.5%. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

20Sep13

2.30

25.84

2.9

11.7

7.8

09Dec13

2.26

26.00

2.9

11.8

7.8

22Mar14

2.39

21.00

3.5

14.6

13.0

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock slowly rising from oversold territory since 04Feb14 and has a current value of 53.46 with upward trajectory. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line has crossed above the red line with the divergence bars flattening in height, indicating the bullish momentum may be getting tired. As for the stock price itself ($83.78), I'm looking at $85.54 to act as resistance and $82.48 to act as support for a risk/reward ratio which plays out to be -1.55% to 2.1%.

Conclusion

I see a contraction in earnings from the trailing twelve months when compared to 2015 and that to me signals a sell. I want to hear how the company reports next time around to see if they can alleviate my concerns. If I don't like what I hear I may have to put this company on the chopping block in May during my quarterly rotation if I don't see any raises in estimates. Fundamentally, the stock is inexpensively priced on next year's earnings but fairly valued on earnings growth. Financially, the efficiency ratios have been raised and we should expect a dividend increase next quarter. Technically, it appears the stock is experiencing slightly bullish momentum. Due to the slightly bullish momentum, inexpensive valuation on next years earnings, and increased financial efficiencies, I'm only going to be buying a very small position at this price.

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!

Source: I'm Concerned About Next Year's Earnings Contraction From Dividend Paying Travelers