Linked here is a detailed quantitative analysis of Cincinnati Financial Corp. (CINF). Below are some highlights from the above linked analysis:
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 here for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CINF is trading at a discount to 2.) and 4.) above. The stock is trading at a 12.5% discount to its calculated fair value of $36.34. 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 here for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CINF earned three stars in this section for 1.), 2.) and 3.) above. A star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a star as a result of its most recent Debt to Total Capital being less than 45 percent. CINF 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 50 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 the previously-linked post for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
CINF earned a star in this section for its NPV MMA Diff. of the $618. 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 5.0% exceeds the 3.4% estimated 20-year average MMA rate.
Memberships and Peers: CINF is a member of the S&P 500 (SPY), a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: The Allstate Corporation (ALL) with a 2.6% yield; The Chubb Corporation (CB) with a 2.5% yield; and The Travelers Companies, Inc. (TRV), with a 2.6% yield.
Conclusion: CINF earned one star in the Fair Value section, three stars in the Dividend Analytical Data section, and one star in the Dividend Income vs. MMA section for a total of five stars. This quantitatively ranks CINF as a Five Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $33.93 before CINF’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 50 years of consecutive dividend increases. At that price the stock would yield 4.69 percent.
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 0.2 percent. This dividend growth rate is below the 1.0% used in this analysis, thus providing a margin of safety. CINF has a risk rating of 1.25, which classifies it as a low-risk stock.
CINF was founded by independent insurance agents in order to better service their needs by providing them with 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. Back in December 2009, CINF’s Free Cash Flow payout was at 78 percent. Since then, the company has worked its FCF payout down to its present level of 47 percent. The company is more heavily exposed to equity risk than its peers; however, management is taking steps to re-balance its investments. I will continue to add to my position in CINF when it is trading below my $36.34 buy price, and as my allocation allows. For additional information, including the stock’s dividend history, please refer to its data page.
Disclosure: At the time of this writing, I was long in CINF (2.0% of my Income Portfolio). See a list of all my income holdings here.