Mixed Feelings About Cincinnati Financial

| About: Cincinnati Financial (CINF)

Today’s next contestant comes to you from the home of the S&P 500 Dividend Aristocrats. Give a big Dividends Matter welcome for Cincinnati Financial Corporation, which trades on the NASDAQ under the symbol (NASDAQ:CINF).

Company Profile:

From Yahoo Finance:

Cincinnati Financial Corporation, through its subsidiaries, offers commercial, personal, and life insurance products to businesses and individuals in the United States. The company operates in four segments: Commercial Lines Property Casualty Insurance, Personal Lines Property Casualty Insurance, and Life Insurance.

CINF has a market capitalization of $7.21B.

Company Fundamentals:

First off, I was only able to get limited data on the return on invested capital. I have the five year average ROIC of 8% and last year’s ROIC of 12.16%.

In these cases, I use the return on equity as a proxy for ROIC. Typically, the ROIC lags the ROE, depending on how much debt the organization has in relation to capital. Now, CINF only has 11.1% total debt as a percentage of capital. So I would assume that the ROE and ROIC would be very close. The 10 year ROE is 5.64% and the five year ROE is 7.18%. Last year’s ROE was 7.04%. Wow. This is the first time that I have seen the ROE (7.04%) lower than the ROIC (12.16%). Also, these are some of the lowest returns on equity that I have ever seen.

Equity growth rate has been pretty abysmal. The nine year average is 3.46%, the five year average is 3.30% and the three year average is 3.24%. These are all pretty consistent - and LOW!

Earnings per share growth rate has seen some major swings from lows of -42% to highs of 63%. And the averages show this inconsistency. The nine year average is 12.25%, the five year average is 25.79%, the three year average is 10.44% and last year’s rate was -18.53%. Quite the roller coaster ride.

Sales growth rates had been fairly steady in the 9% range, but the last two years have delivered rates in the 4% range.

So far, this is not looking like a candidate for our portfolio. And there seem to be some strange data correlations here. Equity growth rate in the 3% range while EPS growth rates have been much higher. The ROE being lower than the ROIC.

Dividend Fundamentals:

CINF currently has a dividend yield of 3.38%. This is above average, when compared to the S&P 500 Index (1.89%) and the DJIA (2.26%).

And the dividend growth rate has been very consistent in the 11% range over the 10 year period. This is a solid dividend growth. Not to mention an above average dividend yield to start with!

The dividend payout ratio has been all over the map. It has been as low as 30% and as high as 86%. Today, the dividend payout ratio sits at 48.38%.

Valuation Models:

From a dividend yield perspective, the five year average high dividend yield is 3%. At today’s dividend yield of 3.38%, this stock will be trading at a discount. If I demand 3% yield, then the model price is $47.36. At the current price of $41.98, that is a discount of 11.36%.

Even Benjamin Graham would agree! The Graham number works out to $53.89. That is a discount of 22.1%!

Now for the discounted present value model, I used the following inputs:

• future EPS growth rate of 3.3% (equity growth rate has consistently been in the 3% range. However, analysts have forecast 10.5%. I am going to stick with history and this very low growth rate).
• future P/E of 6.59 (although CINF is currently trading at a historically low P/E of 12.8, my normal rule of thumb is to allow for a P/E of twice the future EPS growth rate.)
• dividend yield of 3%
• future dividend growth rate of 11.11%

These inputs lead to a model price of $11.58 which means a premium of 262.11%! Of course, this is thanks to this incredibly low P/E value that I used. How reasonable is it? Well, if the future EPS growth rate wasn’t so low, it is normally a good rule of thumb. Now, if I had used the analysts forecast of 10.5% and a P/E of 12.8, then this stock would in fact be selling at a discount of 4.89% (the model price would be $41.98). But personally, I think that rate is not justified from looking at the historical equity growth rates.

See my CINF calculations.

Here is the 1 year stock price chart:


You can see that this stock hasn’t really done much over the last year except show quite a bit of volatility. You can buy it today for the same price you would have bought it for back in February and March 2006.


This has been a very strange stock. From the weird company fundamentals to the discounted present value model, I am not comfortable with this stock. However, I do like the dividend yield and the dividend growth that this stock has delivered over the last 10 years.

What are your thoughts on CINF?

Full Disclosure: Author does not own any shares in CINF.