Munich Re Is One Of The Best 5% Yielding Blue-Chips You've Never Heard Of

Summary

  • Munich Re is the world's largest reinsurance company by premiums.
  • Munich Re might never become a dividend aristocrat, but it's most definitely a safe of safe and steadily rising income.
  • If you're looking for a great high-yield way to sleep well at night and potentially retire in safety and splendor, consider Munich Re.
  • Looking for a helping hand in the market? Members of iREIT on Alpha get exclusive ideas and guidance to navigate any climate. Learn More »

Blue chip stocks

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This article was co-produced with Dividend Sensei.

We love pointing out wonderful companies trading at reasonable to attractive valuations.

We love pointing out high-yield blue-chips even more.

And when we can highlight a hidden gem blue-chip that iREIT and DK members have probably never heard of, well that's just the icing on the cake.

Dividend Sensei recently recommended and bought Munich Re (OTCPK:MURGY) (OTCPK:MURGF) for his retirement portfolio.

Why?

Reasons To Potentially Buy Munich Re

  • 82% quality low-risk 12/13 Super SWAN reinsurance giant

  • 4.7% very safe yield (85% safety score)

  • 1-year dividend growth streak

Munich Re dividend

Munich RE

  • Munich Re has a progressive dividend policy (no dividend cuts and the dividend goes up almost every year)

  • the same policy as Canadian banks and Allianz (OTCPK:ALIZY)

  • 0.5% average recession dividend cut risk

  • 1.8% severe recession dividend cut risk

  • 14% conservatively undervalued (potential good buy)

  • Fair Value: $30.23 (10.9X earnings)

  • 9.4X forward earnings vs. 13 to 14.5X historical

  • AA- stable outlook credit rating = 0.55% 30-year bankruptcy risk

  • 75th industry percentile risk management consensus = good

  • 8% to 14% CAGR margin-of-error growth consensus range

  • 8% to 12.5% individual analyst growth consensus range

  • 10.2% CAGR median growth consensus

  • management guidance: 5+%

  • 5-year consensus total return potential: 13% to 21% CAGR

  • base-case 5-year consensus return potential: 18% CAGR (4X S&P consensus)

  • consensus 12-month total return forecast: 27% (10.1X, very reasonable)

  • Fundamentally justified 12-month returns: 21% CAGR

MURGY 2024 Consensus Total Return Potential

Munich Re 2024 Consensus Total Return Potential

Fast Graphs

Munich Re Rate of Return

FAST Graphs

If MURGY grows as analysts expect by 2024, it could deliver 91% total returns, or 27% annually.

  • Buffett-like returns from an anti-bubble blue-chip bargain hiding in plain sight

MURGY 2027 Consensus Total Return Potential

Munich Re 2027 Consensus Total Return Potential

Fast Graphs

2027 Consensus Total Return Potential

Fast Graphs

By 2027 if MURGY grows as expected and returns to historical fair value, it could more than double and deliver 18% annual total returns.

  • also Buffett-like returns

  • 4X the S&P 500 consensus

So let me show you in greater detail the three reasons why the safety king of its industry is one of the best 4.7% yielding blue-chips you've never heard of.

Reason One: World-Class Quality You Can Trust In All Economic Environments

There are many ways to define and measure quality. So how do I do it?

The Dividend King's overall quality scores are based on a 248 point model that includes:

  • dividend safety

  • balance sheet strength

  • credit ratings

  • credit default swap medium-term bankruptcy risk data

  • short and long-term bankruptcy risk

  • accounting and corporate fraud risk

  • profitability and business model

  • growth consensus estimates

  • management growth guidance

  • historical earnings growth rates

  • historical cash flow growth rates

  • historical dividend growth rates

  • historical sales growth rates

  • cost of capital

  • GF Scores

  • long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters/Refinitiv, and Just Capital

  • management quality

  • dividend friendly corporate culture/income dependability

  • long-term total returns (a Ben Graham sign of quality)

  • analyst consensus long-term return potential

In fact, it includes over 1,000 fundamental metrics including the 12 rating agencies we use to assess fundamental risk.

  • credit and risk management ratings make up 41% of the DK safety and quality model

  • dividend/balance sheet/risk ratings make up 82% of the DK safety and quality model

How do we know that our safety and quality model works well?

During the two worst recessions in 75 years, our safety model 87% of blue-chip dividend cuts, the ultimate baptism by fire for any dividend safety model.

And then there's the confirmation that our quality ratings are very accurate.

DK Zen Phoenix: Superior Fundamentals Lead To Superior Long-Term Results

Metric

US Stocks

191 Real Money DK Phoenix Recs

Great Recession Dividend Growth

-25%

0%

Pandemic Dividend Growth

-1%

6%

Positive Total Returns Over The Last 10 Years

42%

99.5% (Greatest Investors In History 60% to 80% Over Time)

Lost Money/Went Bankrupt Over The Last 10 Years

47%

0.5%

Outperformed Market Over The Last Decade (290%)

36%

46%

Bankruptcies Over The Last 10 Years

11%

0%

Permanent 70+% Catastrophic Decline Since 1980

44%

0.5%

100+% Total Return Over The Past 10 Years

NA

87%

200+% Total Return Over The Past 10 Years

NA

66%

300+% Total Return Over The Past 10 Years

NA

44%

400+% Total Return Over The Past 10 Years

NA

35%

500+% Total Return Over The Past 10 Years

NA

27%

600+% Total Return Over The Past 10 Years

NA

23%

700+% Total Return Over The Past 10 Years

NA

20%

800+% Total Return Over The Past 10 Years

NA

18%

900+% Total Return Over The Past 10 Years

NA

18%

1000+% Total Return Over The Past 10 Years

NA

16%

Sources: Morningstar, JPMorgan, Seeking Alpha

Basically, historical market data confirms that the DK safety and quality model is comprehensive and accurate.

How does MURGY score on the comprehensive and accurate safety model?

MURGY Dividend Safety

Rating

Dividend Kings Safety Score (156 Point Safety Model)

Approximate Dividend Cut Risk (Average Recession)

Approximate Dividend Cut Risk In Pandemic Level Recession

1 - unsafe

0% to 20%

over 4%

16+%

2- below average

21% to 40%

over 2%

8% to 16%

3 - average

41% to 60%

2%

4% to 8%

4 - safe

61% to 80%

1%

2% to 4%

5- very safe

81% to 100%

0.5%

1% to 2%

MURGY

85%

0.50%

1.80%

Risk Rating

Low-Risk (75th industry percentile risk-management consensus) - speculative

AA- Stable outlook credit rating 0.55% 30-year bankruptcy risk

20% OR LESS Max Risk Cap Recommendation

Long-Term Dependability

Company

DK Long-Term Dependability Score

Interpretation

Points

Non-Dependable Companies

21% or below

Poor Dependability

1

Low Dependability Companies

22% to 60%

Below-Average Dependability

2

S&P 500/Industry Average

61% (61% to 70% range)

Average Dependability

3

Above-Average

71% to 80%

Very Dependable

4

Very Good

81% or higher

Exceptional Dependability

5

MURGY

82%

Exceptional Dependability

5

Overall Quality

MURGY

Final Score

Rating

Safety

85%

5/5 very safe

Business Model

60%

2/3 above-average

Dependability

82%

5/5 exceptional

Total

82%

12/13 Super SWAN

Risk Rating

3/3 Low Risk

15% OR LESS Max Risk Cap Rec

10% Margin of Safety For A Potentially Good Buy

MURGY: 180th Highest Quality Master List Company (Out of 506) = 64th Percentile

The DK 500 Master List includes the world's highest quality companies including:

  • All dividend champions

  • All dividend aristocrats

  • All dividend kings

  • All global aristocrats (such as BTI, ENB, and NVS)

  • All 13/13 Ultra Swans (as close to perfect quality as exists on Wall Street)

  • 49 of the world's best growth stocks

MURGY's 82% quality score means it's similar in quality to such blue-chips as

  • Amgen (AMGN)

  • Salesforce (CRM)

  • Honeywell (HON)

  • Intuit (INTU)

  • AvalonBay Communities (AVB)

  • Federal Realty Investment Trust (FRT) - dividend king

  • Consolidated Edison (ED) - dividend aristocrat

Even among the world's highest quality companies, MURGY is of higher quality than 64% of them.

Why Retirees Can Trust Munich Re

Munich Re is the world's largest reinsurance company.

"Munich Re Is Still Probably the Safest Pair of Hands in Reinsurance" - Morningstar

"Munich Re: My Favorite, More Conservative Reinsurer" - Sebastian Wolf

Many analysts consider MURGY to potentially be the world's safest reinsurance company and credit rating agencies agree.

Rating Agency

Credit Rating

30-Year Default/Bankruptcy Risk

Chance of Losing 100% Of Your Investment 1 In

S&P

AA- Stable

0.55%

181.8

Fitch

AA- Stable

0.55%

181.8

Moody's

Aa3 (AA- equivalent) Stable

0.55%

181.8

AM Best

A+ Stable

0.60%

166.7

Consensus

AA- Stable

0.56%

177.8

(Sources: S&P, Fitch, Moody's, AM Best)

In fact, rating agencies estimate the chance of MURGY going bankrupt over the next 30 years (it's fundamental risk for investors) at just 0.56% or 1 in 178.

MURGY was founded in 1880 by the king of Bavaria. Over that time it's survived and thrived through

  • two world wars

  • the worst pandemic in human history (which killed 5% of humanity)

  • dozens of recessions

  • several depressions

  • inflation as high as 327,803.49% per year (115 trillion fold increase in prices over 4 years)

In other words, MURGY is built to last and will likely outlive us all.

The company became famous after the San Francisco Earthquake in 1906, as it was the only insurer that remained fully solvent after paying out all claims, around 15.5M marks at the time...

Warren Buffett is a prominent shareholder of Munich Re. It was once his biggest holding, and now he owns around 3% of the business...

Both Allianz and Munich Re are located in München - even on the same street - and are often considered to be sister companies. The two businesses have had a cross-25% shareholding in their various businesses and operate with extensive connections, common subsidiaries, and operations that have been slowly unwinding over the past decade or so." - Sebastian Wolf

Rating agencies consider ALIZY to be one of the safest insurance companies in the world, so it's very reassuring that ALIZY owns 25% of MURGY's businesses.

MURGY is a highly diversified company.

  • 43% property reinsurance

  • 24% life and health insurance

  • 12% life and health reinsurance

  • 24% of sales from Germany

  • 27% from the US

  • 12% from the UK

  • 38% from the rest of the world

The combined ratio is insurance claims + expenses/premiums collected.

  • under 100% = profitable policies and conservative underwriting

  • MURGY's combined ratio since 2011 has averaged 90.8%

  • despite major disaster years such as 2011, 2017, and the pandemic

  • analysts expect 94% to be the long-term average

  • meaning 6% profitability on policies + portfolio float investment (2.4% to 2.5% investment yield)

Munich Re has made a history of performing well when competitors have been down or posted losses, thanks to titanium-clad underwriting standards and safeties. It's what allowed them to post a near €3B net profit during the financial crisis. Most European peers, including Swiss Re (OTCPK:SSREY) and Hannover Re (OTCPK:HVRRY), posted losses in 2008. The company repeated this feat during COVID-19, posting a €1B net profit during a time when most reinsurance companies were suffering massively due to a global pandemic...

It's by far the most conservative reinsurance shop on the planet, in terms of its underwriting, history, and fundamentals. No national or international peers come close." - Sebastian Wolf (emphasis original)

MURGY's underwriting is the stuff of industry legend.

  • they are the JPMorgan of reinsurance

  • JPMorgan was one of the few banks to sail through the Financial Crisis with profitability and was never at risk of collapse

“Munich operates a flexible dividend policy, preferring to try and increase the dividend over the one delivered to shareholders in the prior year. The last time Munich Re lowered its dividend was in 1970. It seems to us that management operates broadly with an approximate 50% payout policy. Instead of committing to a regular and high payout ratio, Munich Re operates a flexible share-buyback policy. In more stressful times, as in 2020, the EUR 1.0 billion annual buyback was suspended." - Morningstar

MURGY might never become a dividend aristocrat, but it's most definitely a safe of safe and steadily rising income.

  • it hasn't cut its dividend in 52 years

Management's goal is to grow at over 5% over time and grow the dividend at the same rate as earnings.

The board of directors has adopted a progressive dividend policy that makes never cutting the dividend the priority over buybacks.

  • buybacks are used to soak up excess capital in the good times

  • and scaling back buybacks protects the dividend in tough times

Management thinks it can average 13% long-term returns on equity.

  • 8.7% is the median ROE for this industry

The solvency ratio in insurance is the market value of all assets - liabilities.

100% is the global regulatory minimum and MURGY's goal is to average double the regulatory requirement.

  • MURGY finished 2021 with a solvency ratio of 227% including the new higher dividend

MURGY is prepared for a low-interest rate world to continue forever, with various plans to maximize safe net yield on its portfolio.

  • interest rates around the world are now rising at their fastest rate in 40 years

  • Citigroup thinks the European Central Bank will raise short-term rates by 2.5% through 2023

  • German bond yields are soaring to their highest levels in a decade

Germany's 30-year bund was yielding negative rates in mid-2020 and is now yielding over 1%.

And the fastest inflation in EU history (7.5% and climbing) has economists expecting tailwinds for German insurance companies.

In fact, the FactSet economist consensus is that German 10-year yields will double by the end of 2024.

  • insurance companies effectively borrow at zero or negative rates

  • because they fund their investments with float

  • so rising rates are a major benefit for insurance companies

Management has a plan for ERGO, MURGY's insurance operations, to generate see steadily improving profitability, with the combined ratio in Germany falling from 92.4% in 2020 (pandemic year) to 90% by 2025.

  • 10% underwriting profits are very good profitability for this industry

Its international health and life insurance operations are expected to see the combined ratio fall from 92.7% to 91%.

Rating agencies consider 20% to be a safe level for debt/capital. MURGY is running at 15%, even in the pandemic, when claims soared.

MURGY's solvency ratio has never fallen below 208% in the last five years. And in Q4 it hit 231%. MURGY finished 2021 with $50.6 billion in marketable assets vs $22.3 billion in liabilities.

  • $28.3 billion in excess capital reserves

For context, Berkshire (BRK.A) (BRK.B) keeps $20 billion in reserve for its insurance operations.

MURGY has $5.8 billion in debt and 93% of its bonds are denominated in euros and pounds, where interest rates are much lower than in the US.

70% of its bonds mature in 20+ years, locking in the company's profitability for decades.

MURGY has some of the world's best risk models and estimates that no realistic catastrophe could drive its solvency ratio below 200%.

  • once in a 200 year Atlantic hurricane could drop it to 200% from 227%

  • a 30% global stock market crash would drop it to 217%

  • a 1% increase in inflation would leave it untouched at 227%

  • interest rates falling 0.5% (such as during a recession) would reduce it to 217%

MURGY's float is invested in a $274 billion portfolio that's

  • 55% bonds

  • 26% loans

  • 8% alternative assets

  • 7% stocks

  • 5% real estate

  • 1% derivatives

The bond portfolio is 65% risk-free sovereign debt.

41% of the loans are to governments.

Another 37% of loans are securitized.

39% of its alternative assets are in deposits on reinsurance and 14% are bank deposits.

  • 26% German bonds

  • 16% US

  • 7% France

  • 5% Canada

  • 5% UK

  • 5% Dutch

  • 4% Australian

  • 4% EU

  • 3% Spanish

  • 3% Irish

  • 3% Austrian

  • 3% Belgian

  • 2% Luxembourg

  • 2% Polish

  • 1% Italian

  • 15% other

How safe is MURGY's bond portfolio?

  • 42% is AAA rated 0.07% default risk

  • 23% AA 0.51% default risk

  • 13% BBB 7.5% default risk

  • 10% junk bonds or non-rated

Of that 10%

  • 4% BB 17% default risk

  • less than 1% B or less (37+% default risk)

  • 5% not rated

The corporate bonds are highly diversified across every industry with no more than 14% exposure to any single industry.

  • 14% industrials

  • 14% utilities

  • 10% oil & gas

  • 9% financials

  • 8% telecoms

  • 7% healthcare

  • 5% tech

  • 4% auto

  • 4% travel and leisure

  • 4% food

  • 4% construction

  • 4% real estate

  • 3% consumer staples

  • 11% other

92% of its corporate bond are senior, and just 2% are currently generating losses.

MRUGY uses hedging to minimize its exposure to interest rates, credit market swings, and stock market volatility.

  • a 1% increase in EU yields is a 0.2% decrease in profits

  • a 0.5% decrease in yields is a 0.1% increase in profits

  • a 30% gain in stocks is a 0.1% decrease in profits

  • a 30% decrease in stocks is a 0.6% decrease in profits

Basically, MURGY is risk-management done right, in the reinsurance industry.

MURGY Credit Default Swaps: Bond Market's Real-Time Fundamental Risk-Assessment

Munich Re Credit Default Swaps

FactSet

Credit default swaps are insurance policies bond investors take out against default.

  • the bond market's real-time estimate of fundamental risk

  • very useful when headlines are scary and stock prices are crashing

  • MURGY's fundamental risk has risen somewhat after the invasion of Ukraine

  • but still low on an absolute basis and consistent with A- positive outlook credit ratings

  • when the stock price is crashing but the fundamental risk remains stable you can buy with more confidence

  • analysts, rating agencies, and the bond market are all confirming MURGY's investment thesis remains intact

MURGY Profitability: Wall Street's Favorite Quality Proxy

MURGY historical has above-average profitability, in the top 40% of peers.

In 2021 they were impacted by pandemic-related expenses (excess deaths) and various global catastrophes.

MURGY Trailing 12-Month Profitability Vs Peers

Metric

Industry Percentile

Major Insurance Companies More Profitable Than MURGY (Out Of 499)

Operating Margin

NA

NA

Net Margin

38.59

303

Return On Equity

55.06

222

Return On Assets

36.27

315

Return On Capital

NA

NA

Average

43.31

280

(Source: Gurufocus Premium)

MURGY's profitability fell to the 43rd percentile during the pandemic, but analysts are confident that profitability will spring back quickly once this crisis passes.

MURGY has had relatively stale profitability for the last 20 years, confirming a narrow and stable moat.

MURGY Profit Margin Consensus Forecast

Year

FCF Margin

EBIT (Operating) Margin

Net Margin

2020

-0.4%

3.6%

4.9%

2021

2.9%

5.9%

5.4%

2022

3.4%

7.2%

6.1%

2023

2.8%

7.9%

6.1%

2024

0.5%

8.3%

6.1%

2025

NA

8.5%

6.7%

2026

NA

8.5%

NA

Annualized Growth

NA

15.61%

6.23%

Annualized Growth (Ignoring Pandemic)

-45.64%

7.65%

5.68%

(Source: FactSet Research Terminal)

Free cash flow in the reinsurance business is extremely volatile. What is more important is that margins are expected to increase steadily over time.

  • despite numerous headwinds in the industry that management is successfully addressing

MURGY Dividend Consensus Forecast

Year

Dividend Consensus

EPS/Share Consensus

EPS Payout Ratio

Retained (Post-Dividend) Earnings

Buyback Potential

2022

$1.26

$2.63

47.9%

$1,919

5.68%

2023

$1.33

$3.07

43.3%

$2,438

7.21%

2024

$1.41

$3.27

43.1%

$2,606

7.71%

2025

$1.46

$3.38

43.2%

$2,690

7.95%

2026

$1.52

$3.50

43.4%

$2,774

8.20%

Total 2022 Through 2026

$6.98

$15.85

44.0%

$7,733.52

22.87%

Annualized Rate

4.80%

7.41%

-2.42%

9.64%

9.64%

(Source: FactSet Research Terminal)

50% is the safe payout ratio for insurance companies according to rating agencies and that's management's long-term payout ratio policy.

Analysts expect MURGY to maintain a 45% or so payout ratio over time, that over time, allowing it to grow the dividend about 5% annually while retaining almost $8 billion in post-dividend earnings over the next five years.

That's enough to potentially buy back 23% of its shares at current valuations.

MURGY Buyback Consensus Forecast

Year

Consensus Buybacks ($ Millions)

% Of Shares (At Current Valuations)

Market Cap

2022

$1,132.0

3.3%

$33,820

2023

$1,132.0

3.3%

$33,820

Total 2022-2023

$2,264.00

6.7%

$33,820

Annualized Rate

3.41%

Average Annual Buybacks

$1,132.00

(Source: FactSet Research Terminal)

Analysts expect $2.3 billion in buybacks in the next two years or a 3% to 4% annual reduction in share count.

MURGY began buyback back shares in 20106 and has averaged a net rate of 3.2% annually since then.

Time Frame (Years)

Net Buyback Rate

Shares Remaining

Net Shares Repurchased

Each Share You Own Is Worth X Times More (Not Including Future Growth And Dividends)

5

3.2%

84.99%

15.01%

1.18

10

3.2%

72.24%

27.76%

1.38

15

3.2%

61.39%

38.61%

1.63

20

3.2%

52.18%

47.82%

1.92

25

3.2%

44.35%

55.65%

2.25

30

3.2%

37.69%

62.31%

2.65

(Source: FactSet Research Terminal)

That might not sound impressive but it adds up over time.

In the next decade alone MURGY could reduce its share count by 28% and over the next 30 years potentially 62%.

  • which would nearly triple the intrinsic value of your shares

  • not counting any future earnings or dividend growth

Reason Two: Solid Growth Prospects For Decades To Come

MURGY Medium-Term Consensus Forecast

Year

Sales

Free Cash Flow

EBIT (Operating Income)

Net Income

2020

$67,098

-$274

$2,398

$3,320

2021

$67,457

$1,931

$3,982

$3,619

2022

$67,489

$2,261

$4,858

$4,096

2023

$69,846

$1,960

$5,525

$4,286

2024

$69,166

$318

$5,722

$4,216

2025

$64,954

NA

$5,494

$4,347

2026

$66,303

NA

$5,659

NA

Annualized Growth

-0.20%

NA

15.38%

5.54%

Annualized Growth (Ignoring Pandemic)

-0.34%

-45.19%

7.28%

4.69%

(Source: FactSet Research Terminal)

MURGY isn't growing its top line very fast, but its bottom line is moving nicely in the right direction.

Metric

2021 Growth Consensus

2022 Growth Consensus (Bond Market Recession Forecast)

2023 Growth Consensus

2024 Growth Consensus

2025 Growth Consensus

2026 Growth Consensus

Sales

9%

5%

3%

-1%

-6%

2%

Dividend

10%

8%

6%

6%

5%

4%

EPS

143%

17%

16%

7%

3%

6%

Book Value

1%

8%

7%

7%

18%

9%

(Source: FAST Graphs, FactSet Research Terminal)

Even with recession risks rising analysts expect steady and growth from MURGY both in terms of earnings and dividends in the future.

MURGY Long-Term Growth Outlook

Analysts are very bullish on MURGY's growth prospects.

  • consensus range from 5 sources: 10.2% to 12.0%

  • individual analysts range: 8.1% to 12.5%

  • The median growth consensus from all 21 analysts is 10.2%

  • management guidance: 5+%

How accurate are analysts at forecasting MURGY's growth over time?

Smoothing for outliers analyst margins of error are 20% to the downside and 10% to the upside.

  • 8% to 14% CAGR adjusted growth consensus range

  • 70% statistical probability MURGY grows at 8% to 14% over time

Analysts expect MURGY to grow at a similar rate to the last three and 19 years.

  • once interest rate hedges roll-off, higher rates in Europe could allow double-digits growth for the foreseeable future

Reason Three: Munich Re Is A Wonderful Company At A Fair Price

In the modern low rate, high regulation post-GFC era, outside of bear markets and bubbles, tens of millions of investors have consistently paid 13 to 14.5X earnings for MURGY.

  • a 90% statistical probability that this range includes intrinsic value

Metric

Historical Fair Value Multiples (14-years)

2021

2022

2023

2024

12-Month Forward Fair Value

5-Year Average Yield

4.27%

$28.57

$28.29

$28.29

$33.02

13-Year Median Yield

4.54%

$26.87

$26.61

$26.61

$31.06

Earnings

13.83

$40.80

$36.37

$42.46

$45.22

Average

$31.02

$29.87

$31.09

$35.46

$30.25

Current Price

$26.40

Discount To Fair Value

14.88%

11.63%

15.09%

25.56%

12.72%

Upside To Fair Value (NOT Including Dividends)

17.49%

13.16%

17.78%

34.33%

14.58% (19% including dividends)

2022 EPS

2023 EPS

2022 Weighted EPS

2023 Weighted EPS

12-Month Forward EPS

12-Month Average Fair Value Forward PE

Current Forward PE

$2.63

$3.07

$1.82

$0.94

$2.77

10.9

9.5

We estimate MURGY is worth 10.9X earnings, and today it trades at just 9.4X.

Analyst Median 12-Month Price Target

Morningstar Fair Value Estimate

$31.70 (10.1 PE)

$31.00 (11.2 PE)

Discount To Price Target (Not A Fair Value Estimate)

Discount To Fair Value

18.33%

16.48%

Upside To Price Target (Not Including Dividend)

Upside To Fair Value (Not Including Dividend)

22.44%

19.74%

12-Month Median Total Return Price (Including Dividend)

Fair Value + 12-Month Dividend

$32.91

$32.21

Discount To Total Price Target (Not A Fair Value Estimate)

Discount To Fair Value + 12-Month Dividend

21.33%

19.62%

Upside To Price Target ( Including Dividend)

Upside To Fair Value + Dividend

26.94%

24.40%

Morningstar's fair value model is based on a P/BV of 1.2 and is within 2.48% of our estimate.

Across 500 companies DK's average fair value estimate is 1.9% below Morningstar's.

Analysts expect MURGY to deliver 27% total returns in the next year, and 21% of that potential return is justified by fundamentals.

Of course, we don't care about 12-month forecasts, we only care about whether the current margin of safety sufficiently compensates you for the risk profile.

Rating

Margin Of Safety For low risk 12/13 Super SWAN quality companies

2022 Price

2023 Price

12-Month Forward Fair Value

Potentially Reasonable Buy

0%

$29.87

$31.09

$30.25

Potentially Good Buy

10%

$26.89

$27.98

$27.22

Potentially Strong Buy

20%

$23.90

$24.87

$24.20

Potentially Very Strong Buy

30%

$18.82

$21.77

$21.17

Potentially Ultra-Value Buy

40%

$17.92

$18.66

$18.15

Currently

$25.89

13.33%

16.74%

14.41%

Upside To Fair Value (Not Including Dividends)

15.39%

20.10%

16.84%

For anyone comfortable with the risk profile, MURGY is a potentially good buy, and here's why.

Strong Return Potential That Puts The S&P To Shame

For context, here's the return potential of the 14% overvalued S&P 500.

Year

EPS Consensus

YOY Growth

Forward PE

Blended PE

Overvaluation (Forward PE)

Overvaluation (Blended PE)

2021

$206.12

50.17%

20.7

21.3

20%

21%

2022

$226.19

9.74%

19.9

20.3

16%

15%

2023

$249.08

10.12%

18.1

19.0

5%

8%

2024

$275.28

10.52%

16.3

17.2

-5%

-2%

12-Month forward EPS

12-Month Forward PE

Historical Overvaluation

PEG

25-Year Average PEG

S&P 500 Dividend Yield

25-Year Average Dividend Yield

$233.83

19.358

14.88%

2.28

3.62

1.44%

2.01%

(Source: DK S&P 500 Valuation And Total Return Tool)

Stocks have already priced in 94% EPS growth from 2020 through 2024 and are trading at 20X forward earnings.

  • 16.85 is the 25-year average

  • 16.9 is the 10-year average (low rate era)

  • 16.9 is the 45-year average

  • 91% probability that stocks are worth about 17X forward earnings

  • A 13.0% correction needed to get back to the historical market fair value

S&P 500 2027 Consensus Return Potential

Year

Upside Potential By End of That Year

Consensus CAGR Return Potential By End of That Year

Probability-Weighted Return (Annualized)

Inflation And Risk-Adjusted Expected Returns

Expected Market Return Vs Historical Inflation-Adjusted Return

2027

36.03%

6.35%

4.76%

1.45%

22.31%

(Source: DK S&P 500 Valuation And Total Return Tool)

Adjusted for inflation, the risk-expected returns of the S&P 500 are about 1.5% for the next five years.

  • 22% of the S&P's historical inflation-adjusted returns of 6.5% CAGR

S&P 500 Interest Rate Adjusted Market Valuation

S&P Earnings Yield

10-Year US Treasury Yield

Earning Yield Risk-Premium (3.7% 10 and 20-year average)

5.17%

2.92%

2.25%

Theoretical Interest Rate Justified Market Fair Value Forward PE

Current PE

Theoretically Interest Rate Justified Market Decline

15.10

19.33

21.88%

(Source: DK S&P 500 Valuation And Total Return Tool)

Even adjusting for interest rates, stocks still require an even larger 22% correction before they become theoretically fairly valued.

But here's what investors can reasonably expect if MURGY grows as expected over the next five years.

  • 5-year consensus return potential range: 13% to 21% CAGR

MURGY 2027 Consensus Total Return Potential

Munich Re 2027 Consensus Total Return Potential

Fast Graphs

Munich Re Estimated Rate of Return

Fast Graphs

By 2027 if MURGY grows as expected and returns to historical fair value, it could more than double and deliver 18% annual total returns.

  • also Buffett-like returns

  • 4X the S&P 500 consensus

What about the really long-term?

Investment Strategy

Yield

LT Consensus Growth

LT Consensus Total Return Potential

Long-Term Risk-Adjusted Expected Return

Long-Term Inflation And Risk-Adjusted Expected Returns

Years To Double Your Inflation & Risk-Adjusted Wealth

10 Year Inflation And Risk-Adjusted Return

Safe Midstream

5.2%

6.0%

11.2%

7.8%

5.3%

13.5

1.68

Munich RE

4.7%

10.2%

14.9%

10.4%

7.9%

9.1

2.15

Adam's Planned Correction Buys

3.9%

18.9%

22.8%

16.0%

13.5%

5.3

3.54

10-Year US Treasury

2.9%

0.0%

2.9%

2.0%

-0.5%

-156.5

0.95

High-Yield

2.8%

10.3%

13.1%

9.2%

6.7%

10.8

1.91

REITs

2.8%

6.5%

9.3%

6.5%

4.0%

17.9

1.48

Europe

2.6%

12.8%

15.4%

10.7%

8.3%

8.7

2.21

(Sources: Morningstar, FactSet, Ycharts)

Analysts expect MURGY to beat most popular high-yield investment strategies on Wall Street in the long-term

Inflation-Adjusted Consensus Return Potential: $1,000 Initial Investment

Time Frame (Years)

7.4% CAGR Inflation-Adjusted S&P Consensus

8.6% Inflation-Adjusted Aristocrat Consensus

12.4% CAGR Inflation-Adjusted MURGY Consensus

Difference Between Inflation Adjusted MURGY Consensus And S&P Consensus

5

$1,429.63

$1,511.29

$1,794.84

$283.54

10

$2,043.84

$2,284.01

$3,221.44

$937.43

15

$2,921.94

$3,451.81

$5,781.95

$2,330.14

20

$4,177.29

$5,216.70

$10,377.65

$5,160.94

25

$5,971.97

$7,883.98

$18,626.18

$10,742.20

30

$8,537.71

$11,915.01

$33,430.93

$21,515.92

(Source: DK Research Terminal, FactSet)

If MURGY can grow as expected for a decade, it could more than triple your inflation-adjusted wealth. And over 30 years it could be a potential 33 bagger.

Time Frame (Years)

Ratio Aristocrats/S&P

Ratio Inflation-Adjusted MURGY Consensus And S&P Consensus

5

1.06

1.26

10

1.12

1.58

15

1.18

1.98

20

1.25

2.48

25

1.32

3.12

30

1.40

3.92

(Source: DK Research Terminal, FactSet)

Over the next 10 years, MURGY could potentially outperform the S&P by 60%. And over 30 years potentially by 4X.

  • potentially much more if the S&P has a lost decade

MURGY Investment Decision Score

Munich Re Investment decision score

Dividend Kings

Munich Re rating

Dividend Kings

For anyone comfortable with its risk profile, MURGY is as close to a perfect high-yield blue-chip investment as exists on Wall Street today.

  • 14% discount vs 14% market premium = 28% better valuation

  • far superior fundamental quality and safety

  • 50% higher long-term return potential than S&P 500 overtime

  • 3X the risk-adjusted expected return for the next five years

  • 3X the safer yield

Risk Profile: Why Munich Re Stock Isn't Right For Everyone

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

What Could Cause MURGY's Investment Thesis To Break

  • safety falls to 40% or less

  • balance sheet collapses (very unlikely given their portfolio of assets and capital reserves)

  • business model completely disrupted (potentially by smart contracts though insurance giants are most likely to be the ones to introduce them)

  • growth outlook falls to less than 5.3% for six years

  • MURGY's role in my portfolio is to deliver long-term 10+% returns with minimal fundamental risk

  • like all non-defensive sectors (anything that's not REITs, utilities, midstream, healthcare, telecom, consumer staples), I target 10+% long-term return potential for all recommendations

How long it takes for a company's investment thesis to break depends on the quality of the company.

Quality

Years For The Thesis To Break Entirely

Below-Average

1

Average

2

Above-Average

3

Blue-Chip

4

SWAN

5

Super SWAN

6

Ultra SWAN

7

100% Quality Companies (LOW and MA)

8

Source: Dividend Kings

These are my personal rule of thumb for when to sell a stock if the investment thesis has broken.

MURGY is highly unlikely to suffer such catastrophic declines in fundamentals.

MURGY's Risk Profile Summary

“The largest mistake we can see that has plagued the business has been the 1996 $3.3 billion acquisition of American Re and the compounding effect this had on the business' asbestos claims...

Over these early years, Munich had to continually strengthen the reserves within American Re related to these asbestos claims. However, we believe the last time this occurred was in 2005 and net exposure on Munich’s books now stands at EUR 1.0 billion, having peaked in 2014 at EUR 1.75 billion. Since this time, we believe these claims have developed as a net payout rather than the addition of a net claim. While the acquisition may have caused problems, we believe the reserving action taken by management is excellent...

We think Munich Re may face environmental, social, and governance risks in the form of a data breach of customer information; investment risk in its failure to meets its obligations to clients; climate change impacting payouts; data breach within clients and more generally from poor governance.

We think the largest of these are likely climate change and data breaches for clients. We do not view any of these risks as occurring with greater than 25% probability or having more than 25% impact on our fair value estimate. - Morningstar

MURGY's Risk Profile Includes

  • This is a highly volatile industry as far as earnings are concerned

  • disasters and black SWAN events can result in tens of billions in sudden losses

  • legacy liabilities from things like asbestos claims from past acquisitions

  • disruption risk (insurance is potentially disruptable by smart contracts and blockchain, though large insurance companies are the ones likely to institute this in the future)

  • political/regulatory risk - capital requirement changes

  • M&A execution risk: American RE acquisition didn't turn out as well as planned

  • labor retention risk (tightest job market in over 50 years and finance is a high paying industry)

  • cybersecurity risk: hackers and ransomware

  • currency risk: which is managed with hedging

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Material Financial ESG Risk Analysis: How Large Institutions Measure Total Risk

Here is a special report that outlines the most important aspects of understanding long-term ESG financial risks for your investments.

  • ESG is NOT "political or personal ethics based investing"

  • it's total long-term risk management analysis

“ESG is just normal risk by another name." Simon MacMahon, head of ESG and corporate governance research, Sustainalytics" - Morningstar

ESG factors are taken into consideration, alongside all other credit factors, when we consider they are relevant to and have or may have a material influence on creditworthiness." - S&P

S&P, Fitch, Moody's, DBRS (Canadian rating agency), AM Best (insurance rating agency), R&I Credit Rating (Japanese rating agency), and the Japan Credit Rating Agency have been using ESG models in their credit ratings for decades.

  • credit and risk management ratings make up 42% of the DK safety and quality model

  • dividend/balance sheet/risk ratings make up 82% of the DK safety and quality model

Dividend Aristocrats: 67th Industry Percentile On Risk Management (Above-Average, Medium Risk)

MURGY Long-Term Risk Management Consensus ​

Rating Agency

Industry Percentile

Rating Agency Classification

MSCI 37 Metric Model

88.0%

AA, Industry Leader, Stable Trend

Morningstar/Sustainalytics 20 Metric Model

87.2%

16.7/100 Low-Risk

S&P 1,000+ Metric Model

86.0%

Very Good, Stable Trend

FactSet

30.0%

Below-Average, Positive Trend

Morningstar Global Percentile (All 15,000 Rated Companies)

81.8%

Very Good

Consensus

75%

Low-Risk, Good Risk-Management, Stable Trend

(Sources: MSCI, Morningstar, S&P, FactSet

MURGY's Long-Term Risk Management Is The 131st Best In The Master List (74th Percentile)

Classification

Average Consensus LT Risk-Management Industry Percentile

Risk-Management Rating

S&P Global (SPGI) #1 Risk Management In The Master List

94

Exceptional

Strong ESG Stocks

78

Good - Bordering On Very Good

Munich RE

75

Good

Foreign Dividend Stocks

75

Good

Ultra SWANs

71

Good

Low Volatility Stocks

68

Above-Average

Dividend Aristocrats

67

Above-Average

Dividend Kings

63

Above-Average

Master List average

62

Above-Average

Hyper-Growth stocks

61

Above-Average

Monthly Dividend Stocks

60

Above-Average

Dividend Champions

57

Average

(Source: DK Research Terminal)

MURGY's risk-management consensus is in the top 26% of the world's highest quality companies and similar to that of such other companies as

  • T. Rowe Price (TROW) - dividend aristocrat

  • Sysco (SYY) - dividend aristocrat

  • Intuit (INTU)

  • Canadian National Railway (CNI)

  • Salesforce (CRM)

  • American Tower (AMT)

The bottom line is that all companies have risks, and MURGY is good at managing theirs.

How We Monitor MURGY's Risk Profile

  • 21 analysts

  • 4 credit rating agencies

  • 7 total risk rating agencies

  • 28 experts who collectively know this business better than anyone other than management

  • and the bond market for real-time fundamental risk assessments when news breaks

“When the facts change, I change my mind. What do you do sir?" - John Maynard Keynes

There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead we always follow. That's the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.

Bottom Line: Munich Re Is One Of The Best 5% Yielding Blue-Chips You've Never Heard Of

If interest rates keep rising, the stock market might get upset and take a tumble. If the Fed overdoes it with rate hikes, we might even fall into a recession in late 2023.

These are the biggest risks facing investors right now. But that's all they are, risks.

Things that might go bad with the economic fundamentals and corporate profits.

Right now, the economy is strong and recession risk is under 5% according to the NY Fed.

And guess what? Even if there is a recession in 2023 or 2024 or even 2025, there is one company I'm confident will survive and thrive and not cut its dividends.

Since its founding in 1890, Munich Re has passed through many trials by fire.

  • two world wars

  • the worst pandemic in human history (which killed 5% of humanity)

  • dozens of recessions

  • several depressions

  • inflation as high as 327,803.49% per year (115 trillion fold increase in prices over 4 years)

It hasn't cut its dividend in 52 years.

  • not during the Great Recession

  • not during the Pandemic

  • not during periods of 7% interest rates

  • not during periods of -1% interest rates

Rating agencies and analysts consider this one of the safest reinsurance companies on earth.

Good investing is all about sound risk-management and mastering and managing risk is literally all Munich Re has been doing for 132 years.

So if you're looking for a very safe 4.7% yield, that management says will grow at 5+% over time, consider Munich Re.

If you're looking for an attractively valued Super SWAN that analysts think could match the Nasdaq's long-term performance in the future, consider Munich Re.

If you're looking for a great high-yield way to sleep well at night and potentially retire in safety and splendor, consider Munich Re.

Author’s Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.

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This article was written by

Brad Thomas profile picture
105.08K Followers
Author of iREIT on Alpha
The #1 Service For Safe and Reliable REIT Income

Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 6,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha). Thomas is also the editor of The Forbes Real Estate Investor and the Property Chronicle North America.

Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, and 2019 (based on page views) and has over 102,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley). 

Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha (2,800+ articles since 2010). To learn more about Brad visit HERE.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in MURGY over the next 72 hours. 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.

Additional disclosure: Dividend Sensei owns MURGY.

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