Some investors focus only on the current dividend yield while they underestimate the importance of the safety of the dividend and its growth prospects. This myopic approach is certainly harmful for the total income stream an investor receives in the long run. In this article, I will analyze why the dividend of Travelers (NYSE:TRV) is as safe as it gets and is likely to continue to double approximately every 7 years.
First of all, the property/casualty (P/C) insurance business is a tricky one, as an insurer may achieve great results in favorable years by increasing its sales at low prices, only to incur devastating losses during a tough year, i.e., a year with many natural disasters. Therefore, a disciplined underwriting policy is required for long-term success. While many insurers choose to lower their prices in order to achieve revenue growth, Travelers follows a disciplined underwriting policy, which guarantees high long-term returns even though the revenue growth may not be impressive.
For instance, thanks to its discipline, the company has grown its sales only 10% during the last decade but it has grown its earnings per share by 50% over this time frame. Even better, it has been raising its dividend at a consistent annual rate around 10% and hence it has grown it by 150% during the last decade. At this growth rate, the dividend doubles approximately every 7 years. The successful business execution results from the thousands of specialists who work for the company and the long average tenure of its underwriters. It is remarkable that Travelers is the only commercial insurer with a top 5 position in 7 product lines while it has also consistently topped the relevant survey of Goldman Sachs.
Apart from the disciplined execution of the company, the other major reason behind its consistent growth trajectory
