The board of directors of property and casualty insurer W. R. Berkley Corp. (WRB) yesterday approved a 12.5% dividend hike representing new annualized rate of 36 cents per share. The first increased dividend, at a quarterly rate of 9 cents, will be paid on July 3, 2012 to stockholders of record as of June 12, 2012.
Berkley has maintained its track record of increasing dividend over the years. The recent dividend hike represents the seventh consecutive increase from 12 cents paid in 2005. The company has hiked dividends at a five-year compound annual growth rate (CAGR) of 17.6%.
The dividend hike is primarily supported by Berkley’s strong balance sheet, low debt ratio of 22.0% and its ability to generate healthy cash flow.
The share price of Berkley inched up 0.6% to close at $38.46 on Tuesday. It is likely that investors positively reacted to the news, thereby causing a spurt in the share price.
During the same time last year, the company had approved a 14% increase in its annual dividend.
Nevertheless, Berkley is one such company in the U.S. property and casualty industry, with a low dividend yield. Following the increased dividend, the stock will be providing a dividend yield of 0.93%, which is much lower when compared with its peers Cincinnati Financial Corp. (CINF), The Travelers Companies Inc. (TRV), and Assurant Inc. (AIZ), with a dividend yield of 4.7%, 2.9% and 2.3%, respectively. Berkley, however, holds a position above Loews Corp. (L), which has a dividend yield of 0.60%.
Despite a low dividend yield, we witness that the stock has been able to generate decent investor returns. The five-year total return on a $100 investment made on December 31, 2006, assuming the reinvestment of all dividends, was a positive 4.3% for Berkley’s common stock, much higher when compared with a negative 25% for S&P 500 P&C Insurance Index.
We appreciate the company’s efforts to hike dividend even during the recent difficult insurance market conditions. Like most of the property and casualty insurers, Berkley has also been a victim of the soft insurance market conditions. Increasing competition and declining pricing along with management’s disciplined approach towards underwriting has restricted top-line growth since 2007. However, given the company’s fastidious approach towards writing profitable business, it has amassed significant capital, which places it in a favorable position to benefit from the turn in the insurance cycle.
Berkley has started 21 new specialty units since early 2006 in order to position itself for the turn of the insurance cycle. It was on account of these units along with moderate premium increases that Berkley witnessed a 13.2% growth in net premium written in 2011 compared with a mere 0.5% increase in net premium written in 2010.
Berkley is, however, witnessing a continuous improvement in the insurance market. Despite rate increases in several lines of business, there are no visible signs of a broad based rate increase. But we are fairly positive towards Berkley’s stock at this moment. Shareholder returns will continue to be positive due to dividend payouts, share repurchases and business growth. By virtue of its high return on equity, few intangibles, low leverage, sound underwriting and limited exposure to volatility, the stock is uniquely poised to benefit from a turn in the cycle.
Berkley currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term Neutral recommendation on the shares
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BERKLEY (WR) CP (WRB): Free Stock Analysis Report
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