I like that the market tends to get wrapped up in the biggest or hottest stocks in each industry. It often means the crowd is overlooking smaller or lesser-known names with as much or more investment potential and a lot less risk.
One such firm, which describes itself as a commercial lines insurer focusing on liability coverage for businesses, governments and institutions, has raised its dividend 33 years in a row. That's since 1981, back when President Ronald Reagan was in his first term.
The company's current dividend of $0.73 per share is good for a 4.6% yield based on a recent stock price of $15.75. So you know I'm not talking about any of the big insurers you always hear about like American International Group (NYSE: AIG), MetLife (NYSE: MET), Allstate (NYSE: ALL), or Travelers (NYSE: TRV). None of them yield anywhere near 4.6%.
No, I'm referring to Old Republic International (NYSE: ORI), which isn't a household name to be sure. But because of the market's need to fixate on what's most popular, this mid-cap stock with a market capitalization of $4 billion is one of the best kept secrets in the insurance industry.
Among Old Republic's key products are a myriad of policies falling under the broad category of general liability. These include things like extended auto warranties, commercial auto insurance, 'multi-peril' policies for liability arising from the actions of business owners or employees, workers' comp, and home warranties covering repair or replacement of plumbing, heating, and electrical systems. Old Republic is also a major provider of title insurance.
I'm confident income investors can continue to rely on the company's dividend. Besides a long history of increases, the stock has offered a payout since 1941, more than seven decades.
Lately, the dividend has increased about 7% a year from $0.36 a share in 2003 to the current $0.73. Old Republic can comfortably maintain this pace of dividend growth, especially now that the leaner years of the recession (when the company typically posted moderate losses) are fading into history. One indicator is cash flow from operations, which rose nearly 30% in 2013 to $687 million from 2012.
What's more, cash and more liquid short-term investments now total $1.4 billion, the high end of their range during the past 10 years. By contrast, from 2004 to 2007, these assets were more typically around $400 million to $600 million - substantial, but still less than half of current levels. And even then, Old Republic never missed a payout. Its 47% payout ratio is very sustainable and leaves ample room for dividend raises as earnings per share (EPS) growth picks up.
Although general liability has long been Old Republic's largest revenue source and still accounts for more than half of the firm's $5.4 billion in annual sales, the housing recovery has spurred much faster growth in the title insurance business. As the following table illustrates, this business has recently ballooned to the point that it's now approaching general liability in size.
Revenue (in billions)
If the housing market stays on track and the title insurance business keeps booming, title insurance could supplant general liability as Old Republic's largest revenue generator in five or six years. Together, though, the two businesses will likely keep pulling in more than 90% of revenue, as they do now. Other things like consumer credit indemnity coverage and investment income, which make up about 9% of revenue, will likely remain a small portion Old Republic's overall business.
Based on solid growth in the two main business segments (especially title insurance), Old Republic is on track to meet consensus estimates for EPS to rise 10% a year to $2.53 in 2019 from the trailing- 12-month value of $1.57. Investors are currently willing to pay about 10 times earnings for the stock, implying roughly 60% upside during the next five years assuming the same multiple.
Risks to Consider: Because Old Republic does so much title insurance, it clearly has close ties to the housing industry. If housing goes bust, so could Old Republic.
Action to Take --> For reliable income, consider investing in ORI. The company has been paying dividends like clockwork for decades. Its growth prospects look attractive, too.
Prospective investors should probably act fast, though. The stock's earnings multiple is a lot lower than the industry average of 13. With a stock of this caliber, it may not be long before the "secret" gets out and the share price goes up. That, in turn, would push down the yield.