E Should Investors Follow Buffett Into Travelers?

Berkshire Hathaway (BRK-B) recently initiated a 1.3% stake in Travelers (TRV). Investors should not follow the moves of Warren Buffett blindly, as he may have a different investing horizon or goal from them while he is not infallible.

On the other hand, as investors have a lot to learn from Buffett’s investing wisdom, we should pay attention to his moves and analyze them.

In this article, we will analyze whether investors should follow the Oracle of Omaha in his recent purchase of shares of Travelers.

Business Overview

Travelers is a leading provider of property/casualty (P/C) insurance for auto, home, and business. It is the only P/C insurer of the Dow Jones Industrial Average.

The P/C insurance business is a tricky one and hence investors should be very careful in their stock selections. An insurer may achieve great sales during good years by lowering its prices (premiums), only to incur devastating losses in a tough year, with many natural disasters. In other words, the pricing of the insurer is of paramount importance and investors can evaluate its pricing only in an adverse year. Travelers has always followed a disciplined underwriting policy, which has helped the insurer achieve great long-term growth and decent results in adverse years.

Last year was an adverse year for all the P/C insurers, as it included three major hurricanes. Consequently, the earnings per share of Travelers decreased 28%, from $10.13 to $7.27. However, given the magnitude of the natural disasters, the insurer exhibited great performance. Even better, natural disasters promote the long-term growth of insurers, as the latter implement significant price hikes after such years. Indeed, Travelers is poised to grow its earnings per share by 33% this year, from $7.27 to $9.66, and is expected by analysts to grow its bottom line by another 17% next year, to $11.31.

Growth

There has been a major shift in the business strategy of Travelers since its new CEO took over, three years ago. The former CEO, Jay Fishman, who served as CEO for 12 years, did not pursue high sales growth but achieved extraordinary results thanks to strict underwriting policy and aggressive share repurchases. During the 8-year period 2008-2016, Travelers reduced its share count by 52%. As the stock traded at a cheap valuation throughout that period, those share repurchases greatly enhanced shareholder value. During the above period, the company almost doubled its earnings per share, from $5.24 in 2008 to $10.13 in 2016.

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