One Of My All-Time Favorite Special Dividend Payers Just Made Another MASSIVE Payout…

Well, that didn’t take long.

Back in late January, I told readers about one of my all-time favorite special dividend payers: American Financial Group (NYSE: AFG). And just a couple of weeks ago, the company announced another special dividend. (More on that in a second.)

This was part of a larger series we did about my favorite special dividend payers. (If you missed it, I encourage you to start here and comb through our archives if you’re interested.)

As I said then, special dividends are one-time payouts that companies dish out to investors. These payments, usually based on profitability, tend to occur toward the end of the year. And although these payouts are technically non-recurring, make a habit out of paying them, although you won’t always see this reflected on websites like Yahoo Finance or Morningstar.

Another Massive Special Dividend

Based out of Cincinnati, American Financial is a leading provider of property & casualty insurance for commercial clients. In fact, it has been a model of operational excellence for years.

Like most insurers, there is a lag between the day upfront premiums are collected and the time a claim is paid out. In between, the company is free to invest that float money (the secret to Warren Buffett’s riches), pocketing any income and gains.

Most of that cash goes into floating-rate securities that deliver a respectable income stream. Of course, several rate hikes have enhanced the earnings power of this multi-billion dollar portfolio.

I added AFG to my High-Yield Investing portfolio on January 23, praising “the most generous special dividend track record I’ve ever seen.” Over the past two years, the insurer has dished out eight supplemental distributions totaling $38 per share.

favorite special dividend payer

Source: AFG Investor Presentation

Well, we just got another one.

One week after my recommendation, AFG declared an upcoming special dividend of $340 million, or $4.00 per share. That’s equivalent of more than six regular quarterly dividends (which, by the way, have risen for 17 straight years).

Consider it a nice bonus following another year of record profitability.

The specialty insurer just closed out fiscal 2022 with adjusted net operating earnings of $11.63 per share, a new high-water mark. Despite elevated catastrophe claims, most notably from Hurricane Ian (the strongest category 4 to strike Florida in decades), each of the company’s insurance segments maintained strong fourth-quarter combined ratios below 90.

This important metric, generally calculated as claim losses plus expenses as a percentage of earned premiums, has one thing in common with golf — the lower the score, the better. AFG’s core insurance operations retained a sizeable chunk of last year’s earned premiums, resulting in roughly $1 billion in underwriting profits.

But as I explained earlier, that’s just icing on the cake. The real money is generated from the firm’s massive portfolio of stocks, bonds, and alternative investments.

AFG Remains A Favorite Special Dividend Payer

All told, AFG posted an impressive return on equity of 21.2% for the year. Shareholders get quite a bit of bang for their equity buck. And the company doesn’t have to plow billions into inventory. Or buy pricey manufacturing equipment. Or invest in research and development.

So in the words of CEO Carl Lindner, “returning excess capital to shareholders in the form of regular and special dividends is an important and effective component of our strategy.”

AFG has written $6.2 billion in net new premiums (the lifeblood of an insurer) over the past year. That’s a healthy 11% increase. Meanwhile, book value per share, Warren Buffett’s preferred measure for an insurance operation, has grown 18.5%, including dividends.

The stock carries a double-digit trailing yield (including regular and special dividends). Plus, the company reaffirmed earnings guidance for up to $12 per share this year. AFG remains one of my favorite special dividend payers. It’s a solid option any income investor who wants a special “bonus” every so often.

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