Unitrin Inc (UTR) 5.56% YTM 11/30/2015
Unitrin is an insurance / financial services company based in Chicago, Illinois. It is the parent company to numerous subsidiaries that provide a diverse array of insurance and consumer finance products. It services clients that range from individuals to small businesses. Unitrin, Inc. was founded in 1990 when it was spun off from the conglomerate Teledyne.
At Durig Capital, we have developed a process for our clients to review, select, purchase and monitor corporate bonds. Enclosed is our review along with supporting documents showing why we believe it makes sense with our Corporate Bond clients' portfolios. We reviewed thousands of separate Corporate Bond listings to find what, we believe, is currently the best Corporate Bond for investors. The following includes our selection criteria.
Step 1 - Yield Curve at 4-7 Years Out.
In these current economic times, fixed income investors are finding it more and more difficult to find adequate yield to meet their needs. The US government has announced plans to continue to keep interest rates at artificially low levels which, in theory, could help the economy return to its previous pre-crisis levels. This leaves fixed income investors in a bind, as net creditors are not rewarded with these actions. These actions--along with the growing debt of the US government on federal, state, and local levels-- brings the real possibility of growing inflation. To obtain a higher yield and avoid possible long term inflation, we recommend limiting fixed income investments to less than 7 years.
Unitrin is a well funded company that offers investors a 5.56% yield maturing in less than five years, which meets our criteria. We are recommending that clients take a position in five year maturity bond, however Unitrin also has an issue that matures in 2017, the longer end of our time frame that offers a yield to maturity of 5.74%.
Step 2 - First and foremost companies must be profitable
During the last quarter, Unitrin earned $0.74 per share. During the past four quarters, Unitrin has earned just under $4 per share. This is unique for a financial firm, as some of its competitors are struggling-- such as AIG. We have reviewed companies, such as Toll Brothers, that may be considered part of a struggling sector that are outperforming their peers.
On top of Unitrin’s profitability, one potential additional layer of safety is the dividend it pays out. Fixed income obligations are met before shareholders can be paid. Currently, Unitrin is paying shareholders $0.22 per quarter or $0.88 per year. The company has paid a dividend since the early 1990's. During the financial crisis which maimed much of the insurance industry, Unitrin did cut its dividend. It should be noted however, that its dividend did increase by 10% in 2010. Having management that is comfortable paying and raising a dividend should provide creditors with some comfort about the company’s financial well being.
Step 3 - We like companies with solid interest coverage ratios
A positive sign for fixed income investors is the company's ability to generate earnings on a pretax level which is also called EBITA (earnings before interest, tax, and amortization). Last quarter, as reported in the SEC filings, Unitrin announced that it had EBITA of $76.4 million and interests expenses of $22.6 million. Having an EBITA that is just under four times larger than interest expense illustrates the company's ability to make payments.
Step 4 - We like companies with low debt to cash ratio.
Unitrin's current long term debt is $561 million, while cash and short term investments totaled $554 million. If Unitrin applied the current cash and investments to current long term debt, there would be almost no debt left. Companies that have the option to pay off their debt at will are healthier than companies that are bloated with debt. Unitrin's long term debt to cash has similar metrics to Coventry Health (CVH) that has done well for our clients.
Step 5- We like to see flexibility on the balance sheet.
Unitrin has a good looking balance sheet. Zach's insurance sector report illustrates this point. Unitrin has a long term debt to equity ratio of .26, while the industry average is at .36. Comparing Unitrin to its peers suggests that the industry in general has greater amounts of debt compared to equity financing. Finding fixed income issuers with outstanding debt to equity (the best we've seen was in our Netflix Review), is important as it allows the issuer greater flexibility.
A.M. Best Co. has affirmed the financial strength rating of "A-" (excellent) and issuer credit ratings (ICR) of “A-” for Unitrin and its subsidiaries. It is important for companies in the insurance industry to receive high marks from third parties like A.M. Best Co. because higher marks often mean it is easier to raise capital.
Step 6 - We like high yields.
Unitrin bonds currently have a 5.56% yield to maturity for the bond maturing 11/30/2015 and offer a 5.74% yield for the bond maturing on 05/15/2017. While we recommend the shorter term maturity, either could be considered a good addition to an established fixed income portfolio.
This is a good 5.56% yield bond for less than 5 years. Even though it had a lower rating, Unitrin is profitable, better than its peer sector long term debt to equity and has good interest coverage ratios. In our opinion Unitrin could be a good addition to one's fixed income portfolios. We have written previous reports on companies fixed income that have had similar attributes such as Belden (BDC), DaVita (DVA), EchoStar (SATS) and Fidelity (FNF). These positions have done well for our clients. We believe that with the low debt level and good profitability, Unitrin could be well situated for an upgraded bond rating. You can find other Corporate Bonds listed on our web site here.
Yield to Maturity 5.56%
Yield to Call 5.56%
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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UTR over the next 72 hours.
Additional disclosure: Durig Capital is currently recommending Unitrin's bonds to clients.