I finished a series on dividend kings, companies that have paid an increasing dividend for 50 or more years. The series of 18 articles has produced companies that range from small cap to large cap with varying dividend growth rates from 1% to 26%. I really expected all of these companies to be good investments but some of them disappointed me. I wound up doing focus articles on companies that very quickly could be seen as not good long term investments when compared using the Good Business Guidelines.
So I got the idea of another series, companies that only had one letter in their symbol (no logical reason for this but just for fun), but did not want to do full reviews of companies that did not show promise. This is the ninth and final part of the series. I calculated the total return for each of the next 6 companies and will do individual articles on the ones that pass the positive total return guideline for the last 44.8 months. I chose the 44.8 month test period (starting January 1, 2013 and ending in mid September) because it includes the great year of 2013, and other years that had fair and bad performance.
The Dow baseline for 44.8 months is 39.37%
Total Return %
Difference from base line
AT&T Inc. (NYSE:T)
Visa Corp. (NYSE:V)
United States Steel Corp. (NYSE:X)
Alleghany Corp. (NYSE:Y)
Average total return for the 22 companies looked at is 28.63% underperforming as a group by 10.74%.
Part 8 of this series covered Visa. Part 9 covers the last company, an individual look at the latest fundamentals of Alleghany Corp. is shown below.
What this series shows is that there is no correlation between single letter companies and total return, surprise , surprise. The series did find some good investments like Kellogg (NYSE:K) which will be the next purchase in The Good Business Portfolio. I hope you enjoyed this random walk down wall street it uncovered some good and bad investments.
This article is about Alleghany Corp. and why it's a total return company that is being reviewed by The Good Business Portfolio. Alleghany Corporation is an insurance holding company. Fundamentals of Alleghany 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.
Alleghany Corp. passes 9 of 11 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: Update To Guidelines and July 2016 Performance Review". 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.
Alleghany Corp. is a large-cap company with a capitalization of $8.0 Billion. The other companies in this peer group range in capitalization from $12 Billion : Markel Corp (NYSE:MKL) to $5 Billion : First American Financial Corp. (NYSE:FAF), so no one company dominates this sector and it would be difficult for Alleghany Corp. to buy out one of the smaller companies.
Alleghany Corp. does not pay a dividend but the good total return over the DOW average makes up for it, leaving all its earnings left to grow the business and buy back shares. Alleghany Corp. is therefore not a choice for the income investor that needs current income. The total return is good which makes up for the 0.0 dividend as long as you are a long term investor and do not need current income.
Alleghany Corp. has good cash flow with all its earnings going to its continued business investment expansion and buy back of shares.
I also require the CAGR 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% more for a yearly distribution of 5%. Alleghany Corp. has a three-year CAGR of 8.5% more than meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth over $18,600 today. This makes Alleghany Corp. a good investment for the long term total return moderate growth investor.
Alleghany Corp. From Thomson Reuters Alleghany Corp. is a buy with a calculated target price of $572. Alleghany Corp. is then under priced by 8% at present compared to the target price and a choice for a long tern investor that does not need current income. The PE is inline relative to the market at 18.
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, the total return guideline was just added to my list of guidelines. Alleghany Corp. did much better than the Dow baseline in my 44.8 month test compared to the Dow average. I chose the 44.8 month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The good total return makes Alleghany Corp. a company for the total return growth investor. Alleghany Corp. pays no dividend, eliminating the company for the income investor but leaves plenty of cash available for growing the business and stock buy backs. DOW's 44.8 month total return baseline is 39.37%. The total return during the test period for Alleghany Corp. is above the DOW average at 50.57% beating the DOW baseline by 11.20%. YTD total return is 9.86% beating the DOW average by 5%.
Dow Baseline 39.37%
44.8 Month total return
Difference from DOW baseline
Yearly Dividend percentage
The price chart below shows the steady growth of Alleghany Corp. over the past five years.
Last Quarter's Earnings
For the last quarter on August 2, 2016 Alleghany Corp. reported earnings that missed expected earnings at $2.96 compared to last year at $8.19 and expected at $6.21. Total revenue was higher at $1.26 Billion up from last year by 17.8% and beat expected revenue by $100 Million. This was a fair report with the company having to expense some catastrophic claims. This is not typical of Alleghany Corporation earnings, for the previous four quarters the company beat the estimated earnings and grew at its normal 10%. Earnings for the next quarter will be out in early November and is expected to be $7.21 compared to last year at $7.03. Alleghany Corp. is continuing its buy back of shares further increasing the earnings and total return.
The following is from the last earnings statement " As of June 30, 2016, Alleghany had 15,439,250 shares of its common stock outstanding, compared with 15,544,077 shares of its common stock outstanding as of December 31, 2015. As of June 30, 2016, Alleghany had $394.2 million remaining under its share repurchase authorization. Alleghany did not repurchase any shares during the second quarter. For the first six months of 2016 Alleghany has repurchased 113,100 shares at an average price of $471.15 per share".
Alleghany Corporation is an insurance holding company. The Company owns and manages operating subsidiaries and investments, which are involved in the property and casualty reinsurance and insurance. The Company operates through two segments: reinsurance and insurance. The Company's reinsurance segment consists of property and casualty reinsurance operations conducted by the Company's subsidiary, Transatlantic Holdings, Inc. (TransRe), and its reinsurance operating subsidiaries. The Company's insurance segment consists of property and casualty insurance operations conducted by Alleghany Insurance Holdings LLC (AIHL) through its insurance operating subsidiaries, RSUI Group, Inc. (RSUI), CapSpecialty, Inc. (CapSpecialty) and Pacific Compensation Corporation (PacificComp). The Company owns and manages properties in the Sacramento, California region through its subsidiary, Alleghany Properties Holdings LLC (Alleghany Properties).
Alleghany Corp. is continuing its growth with book value per common share increasing to $512.84 as of June 30, 2016, an increase of 5.5% from book value per common share as of December 31, 2015.
It is this continued growth that makes Alleghany Corp. an interesting business for the conservative total return investor that does not need current income.
Takeaways and Recent Portfolio Changes
Alleghany Corp. is a good investment for the total return slow growth investor that does not need current income. Alleghany Corp. will not be considered for The Good Business Portfolio since it pays no dividend and I need some income being in retirement. I am in retirement and want conservative investments that pay a fair dividend of 2-3% and moderate growth 6-8%. This concludes this series, it uncovered some good companies in the process and I hope you enjoyed the articles and found some investments that fill your goals.
Trimmed Cabela's (NYSE:CAB) from 6.3% of the portfolio to 5.6% they have received a bid of $65.50 cash for their shares, which to me is a fair price. I want to take a bit off the table in case the deal does not go through. I also would like to deploy the proceeds to increase the dividend paying companies in the portfolio.
Increased Omega Health Investors (NYSE:OHI) from 4.5% of the portfolio to 4.8% of the portfolio, I needed a little more income and OHI will give that to the portfolio. The portfolio will fill in the open portfolio slot with Kellogg when cash is available.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold August 50'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. The HOG price is presently above the strike price and I have moved the calls up and out. On August 10 the portfolio moved the HOG calls up and out to November 52.5's. HOG sales are weak and I will hold the calls and collect the tome value.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (NYSE:JNJ) is 8.6% of the portfolio, Altria Group Inc. (NYSE:MO) is 7.8% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio and Boeing (NYSE:BA) is 8.1% of the portfolio, therefore JNJ and BA are now in trim position with Home Depot and Altria 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. For BA from the second 2016 earnings call deferred costs increased $33 Million a small amount and I project positive cash flow from the 787 program in the third quarter of possibly $100 Million. The KC-46A refueling plane has been authorized by the Pentagon for its initial production, this will be a big step to increase Boeing's already high cash flow even more. The contract has still to be awarded, which should be soon. Looking forward I expect Boeing to beat the expected third quarter earnings of $2.52 but will not trim it until it reaches 10.0% of the portfolio. About 1.6 years ago Boeing got above 10% of the portfolio and I trimmed it a little to get it below 10% of the portfolio. Recently on September 21, 2016 Boeing got approval from the United States government to sell commercial planes to Iran, a large sale. Boeing on October 6, 2016 received a $11.7 Billion order from Qatar for 30 787-9 and 10 777-300ER's planes which helps make it easier to meet year end goals.
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 The Good Business Portfolio: 2016 Second-Quarter Earnings and Performance Review 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, AA, Omega Health Investors 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, JNJ, HD, MO, OHI, CAB, 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.