This is the tenth in a series of articles that will take a look at the dividend Kings, companies that have paid an increasing dividend for 50 or more years. So far this series of articles has produced companies that range from small cap to large cap with varying 5 year dividend growth rates from 1% to 17%. I was surprised to find all kinds of companies in the list like Johnson and Johnson (NYSE:JNJ) a large cap company with dividend growth of 7% and some other companies with dividend growth of less than 1%. I really expected all of these companies to be good investments but some of them disappointed me, so on with the study. This article is about Cincinnati Financial Corp. (NASDAQ:CINF) and why it's a dividend income growth investment and total return investment that has increased its dividend for 55 years making it a dividend King and has in the last 42.2 months had a great total return. Cincinnati Financial Corporation is an insurance holding company. The Company is engaged in the business of property casualty insurance marketed through independent insurance agencies in over 40 states. Cincinnati Financial Corp. is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Cincinnati Financial Corp. will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.
Good Business Portfolio Guidelines
Cincinnati Financial Corp. passes 10 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, and growing companies that keeps me ahead of the Dow average.
Cincinnati Financial Corp. is a large-cap company with a capitalization of $12.3 billion. The size of Cincinnati Financial Corp. steady income from its insurance business, allows it to pay its above average dividend and maintain its business growth. Cincinnati Financial Corp. is a insurance business that can handle any problems that occur in their business by raising their rates to cover expenses, and does have good expansion prospects. It has larger competitors like Travelers (NYSE:TRV) with a capitalization of $35 Billion and Allstate (NYSE:ALL) with a capitalization of $26 Billion.
Cincinnati Financial Corp. has a dividend yield of 2.57% which is above average for the market. The dividend has been increased for 55 years and its dividend is very safe. The payout ratio average over the last 5 years is 54% which leaves enough cash to pay its high dividend and maintain the company's business growth. Cincinnati Financial Corp. is therefore a good choice for the dividend income growth investor. After paying the above average dividend there is still cash remaining for maintaining and growing the business.
Cincinnati Financial Corp. yearly earnings and cash flow is great and leaves enough cash after paying its high dividend for maintaining and growing its business. So far this year they have added 26 new agents to grow the business and does business in 40 states.
I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Cincinnati Financial Corp. has a 3 year forward CAGR of 6.0% (from S&P Capital IQ) meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth $30,900 today (from S&P Capital IQ). This makes Cincinnati Financial Corp. a good investment for the dividend income growth investor and a good choice for the total return investor. For Cincinnati Financial Corp. S&P Capital IQ has a three star rating or hold with a one year price target of $70.00. This makes Cincinnati Financial Corp. fairly priced at present and with projected growth of 6% over the next year. In the long term Cincinnati Financial Corp. above average dividend and its growing business in the insurance sector is a good choice for the dividend income growth investor and the total return investor
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Cincinnati Financial Corp. had much better total return than the Dow baseline in my 42.2 month test period. I chose the 42.2 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the slightly positive year of 2016 YTD to see how the company does in good and bad markets. This above average total return of 105.97% for Cincinnati Financial Corp. compared to the DOW baseline of 38.50% makes Cincinnati Financial very appropriate for the total return investor. Cincinnati Financial Corp. has done better than the economy over the test period and has a dividend growth of 4.70% over the past 10 years. In 2013 a good year Cincinnati Financial beat the DOW total return at 31.54% compared to the DOW base of 27%. Year to date total return is 27.94% well ahead of the DOW gain so far this year. The dividend is above average at 2.57% and has been increased for 55 years making the company a dividend King.
DOW's 42.2 month total return baseline is 38.50%
42.2 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Cincinnati Financial Corp.
Last Quarter's Earnings
For the last quarter Cincinnati Financial Corp. reported earnings on April 26, 2016 that beat expected earnings at $0.89 compared to last year at $0.59 and expected at $0.70. Revenue beat expected by $130.0 Million and total revenue increased by 6.3% year over year to $1.36 Billion. This was a great report showing the increased revenue and beating the earnings goal. This leaves enough cash remaining after paying the $0.48 dividend for business expansion. Earnings for the next quarter will be released on July 26, 2016 and is expected to be at $0.63/share compared to last year at $0.83/share. From the last earnings call management said that there cash & securities increased $1.907 Billion in the last quarter a 9% increase.
Company Business Overview
Cincinnati Financial Corporation is an insurance holding company. The Company is engaged in the business of property casualty insurance marketed through independent insurance agencies in over 40 states. It operates through five segments: Commercial lines insurance, Personal lines insurance, Excess and surplus lines insurance, Life insurance and Investments. It operates through three subsidiaries: The Cincinnati Insurance Company, CSU Producer Resources Inc. and CFC Investment Company. Its market property casualty insurance group includes two of those subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group writes business, homeowner and auto policies. Other subsidiaries of The Cincinnati Insurance Company include The Cincinnati Life Insurance Company, which provides life insurance, disability income policies and fixed annuities, and The Cincinnati Specialty Underwriters Insurance Company, which offers excess and surplus lines insurance products. Cincinnati Financial Corporation business is a steady growing company that should be considered for the dividend growth income investor, its steady increasing earnings are almost guaranteed because of the insurance being regulated, and there projected growth is good at 6%. CINF is doing very well now because of the increases in policy rates and is fairly priced now with 5-6% growth in 2016 yet to come. Risk in the company is its high investment in equities at 33% compared to the industry of 15%. If the market does well Cincinnati Financial Corporation will do great, if the market slumps this will hurt Cincinnati Financial Corporation.
Takeaways and Recent Portfolio Changes
Cincinnati Financial Corp. is a good choice for the dividend growth income investor increasing its dividend for 55 years and growing the dividend in the future and is fairly priced right now with projected growth of 6% in the following year. Cincinnati Financial Corp. beat strongly the total return compared to the Dow average and is a good choice for the total return growth investor. The business is growing at 6% CAGR and Cincinnati Financial Corp. is in the insurance sector which seems to do well even in this slow 2% economy with low interest rates. The Good Business Portfolio does not have an open slot right now and will definitely consider Cincinnati Financial Corp. because of its long term growth rate and great total return. If you don't already have a position in the insurance sector CINF may be worth a position for your dividend growth income segment and total return segment with 6% long term growth. CINF is one company I am pleased with as a solid long term company found from this study.
Sold small position of spin off Fortive (NYSE:FTV) to keep number of positions at 25 or less.
Bought more of the Eaton Vance Enhanced Equity Fund II (NYSE:EOS) bringing it up to 7.0% of the portfolio.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold July 45's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. Bought to close all HOG options on the Brexit dip and made a few dollars. On Friday July 1 there were rumors that HOG may be bought out and it jumped up 18%. I will wait a while to see what develops before selling more calls or trimming the position.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the six top positions in The Good Business Portfolio. Johnson and Johnson is 8.7% of the portfolio, Altria Group Inc. (NYSE:MO) is 8.2% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio, Boeing (NYSE:BA) is 7.6% of the Portfolio, Eaton Vance Enhanced Equity Fund II is 7.0% of the Portfolio and Walt Disney (NYSE:DIS) is 6.7% of the portfolio, therefore MO and JNJ are now in trim position with Boeing, Home Depot, the Eaton Vance Equity Fund II and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. In the first quarter of 2016 deferred costs were $141 Million and deceasing as the year goes on. Deferred costs should start to decrease in the coming quarters and positive cash flow from the 787 program start to happen. JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, CAB, JNJ, DIS, MO, OHI, EOS, HOG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.