E Old Republic International: Undervalued Dividend Champion

Despite the coronavirus crisis, S&P rallied 16% in 2020, to a new all-time high. Consequently, most Dividend Champions have become fully valued and hence it has become especially hard for income-oriented investors to identify attractive stocks for their portfolios.

Old Republic International (ORI) is a bright exception. This dividend champion has lagged the broad market in the last 12 months and thus it is currently offering a 4.4% dividend yield and is trading at just 10 times its earnings per share. Therefore, income-oriented investors should put this stock on their radar.

Business overview

Old Republic International engages in insurance underwriting, primarily in the U.S. and Canada. General insurance comprises 60% of the revenue of the company while title insurance generates 38% of its total revenue. General insurance is characterized by higher combined ratios (lower margins) while title insurance has strong combined ratios, in the low 90s, and much fewer capital requirements. Old Republic is the third-largest title insurer in the U.S. and a member of Fortune 500.

Investors should be especially careful with insurers, which should be evaluated based on their long-term performance. Some insurers may be tempted to reduce their insurance premiums to gain market share and thus they may post strong results in the short run. However, such insurers will be severely hurt in an adverse year, with too many claims. Therefore, it is critical for investors to examine the long-term performance of insurers.

Old Republic has an exceptional performance record. It has maintained a combined ratio around 96 in general insurance for more than 15 years. It has also paid uninterrupted dividends for 79 consecutive years and has raised its dividend for 39 consecutive years. This exceptional dividend growth record is a testament to the long-term perspective of Old Republic and its disciplined underwriting policy.

In the third quarter, Old Republic grew its net premiums and fees 7% over the prior year’s quarter thanks to 17% growth in title insurance. In addition, its combined ratio improved from 94.4% to 92.0% and thus its operating earnings per share grew 22%, from $0.51 to $0.62. In the first nine months of 2020, the insurer grew its earnings per share 10% over the prior year’s period. Overall, the company has proved remarkably resilient to the severe recession caused by the pandemic.

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