Weaker investment yield continues to be a concern for Tower Group Inc. (TWGP). In response to this environment,
management had implemented a strategy to purchase dividend paying common stocks during the
fourth quarter to enhance investment income.
The company is also evaluating alternative investment classes to further enhance the investment income. Though management is trying ways to offset pressure from low interest rate, we are not sure as to whether the company will be successful with this strategy.
Our six-month target price of $22.00 equates to about 8.4x our earnings estimate for 2011. We view the $0.50 per share annual dividend as secure, implying a total negative return of about 7.4% over that period, which is consistent with our Underperform recommendation on the shares.
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