E Old Republic International: Undervalued Dividend Champion

Growth prospects

Old Republic stock has generated a total market return of 11.0% per year over the last 20 years. However, investors should be aware that the earnings of the company have been quite volatile over the last decade, just like evidenced in nearly all insurers.

Old Republic has grown its earnings per share at a 6.7% average annual rate over the last six years. Thanks to the reliable long-term record of the company and the strong momentum in its title insurance, it is reasonable to expect the insurer to continue growing its earnings in the upcoming years. However, it is important to note that Old Republic achieved record earnings per share of approximately $1.95 in 2020. As this figure is a high comparison base and given the competition in general insurance, it is prudent to assume 4.0% average annual growth of earnings per share over the next five years.

Dividend

Old Republic has raised its dividend for 39 consecutive years and hence it is a dividend champion. The stock is currently offering a 4.4% dividend yield, which is nearly triple the dividend yield of the S&P 500 (1.5%). Even better, Old Republic has offered a special dividend of $1.00 per share in each of the last three years. At the current stock price, the special dividend corresponds to an additional 5.2% dividend yield.

Moreover, the regular dividend is well covered, with a payout ratio of only 43%. Furthermore, Old Republic has a remarkably strong credit rating of A+ in its property/casualty business and A in its title insurance business. It also has no debt maturities until 2024 and its investment portfolio consists of 75% bonds with A+ credit rating and 25% equities, primarily blue chips. Overall, the regular dividend of Old Republic should be considered safe for the foreseeable future.

Valuation – Expected Returns

Old Republic has traded at an average price-to-earnings ratio of 14 over the last decade. In order to be on the safe side, we assume a fair price-to-earnings ratio of 12.5 for this stock. The insurer is currently trading at a price-to-earnings ratio of 9.9. We expect the pandemic to subside at the second half of the year and thus we expect Old Republic to trade around its fair valuation level in five years from now. If this materializes, the stock will enjoy a 4.8% annualized boost in its returns thanks to the expansion of its valuation level.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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