Updated on February 24th, 2021 by Bob Ciura
Only companies in the S&P 500 Index, with at least 25 years of dividend growth, can claim the title of being a Dividend Aristocrat. This club is so exclusive that there are only 65 such companies in the S&P 500 Index. As a result, Dividend Aristocrats are relatively rare among the broader S&P 500.
With this in mind, we created a list of all 65 Dividend Aristocrats, along with important financial metrics like price-to-earnings ratios and dividend yields. You can download a copy of the Dividend Aristocrats list by clicking on the link below:
Chubb Ltd. (CB) is a relatively new addition to the list, having joined within the past few years. It announced its 27th consecutive annual dividend increase in 2020. Chubb yields 1.9% right now, which is not a high dividend yield, although it does beat the average yield of the S&P 500 Index.
While Chubb is not a high-yield dividend stock, it does provide consistent dividend increases each year, backed by a strong business model.
Chubb is based in Zurich, Switzerland and provides insurance services including property & casualty insurance, accident & health insurance, life insurance, and reinsurance. The company operates in over 50 countries and territories. It is the world’s largest publicly traded P&C insurance company and the largest commercial insurer in the U.S.
Chubb has a large and diversified product portfolio.
Source: Investor Presentation
Chubb’s diversified product line served the company well in 2020, as it was able to remain highly profitable and even produce some growth. Revenue totaled $8.4 billion during the fourth quarter of fiscal 2020, up 6% year-over-year. Net written premiums rose 5% year-over-year in Chubb’s core P&C segment, totaling $7.8 billion.
Net investment income of $850 million declined slightly from $860 million in the year-ago quarter. Book value was up by 6% during the fourth quarter, having grown to a new record level of $132 per share.
For 2020, Chubb reported core operating income of $7.31 per share. Assuming markets continue to perform well, and the global economy continues to recover from the coronavirus pandemic, Chubb has a positive growth outlook for 2021.
Chubb has created significant value for shareholders in terms of book value per share, an important metric for insurance companies. Since 2007 the company’s book value has grown at a compound average growth rate of ~8% per year.
Chubb compares favorably in terms of profitability versus many of its peers. Its combined ratio for the 2020 fourth quarter was 87.6%. Chubb has outperformed its peers on this metric over the past 1, 3, 5, and 10 years.
Source: Investor Presentation
Note: The combined ratio is calculated as the sum of incurred losses and expenses divided by earned premiums. A combined ratio under 100% shows the insurance company is operating profitably before investment income. A combined ratio in excess of 100% shows unprofitable underwriting.
As an insurance company, Chubb has a large pool of accumulated premium income that has not been paid out in claims to customers. This is known as float. Insurers invest premiums as soon as they are collected, to earn interest or other income.
Chubb had a fixed income investment portfolio of $108 billion at the end of 2020, invested primarily in investment-grade fixed income securities. Higher interest rates can be a positive catalyst for Chubb’s investment income, but lower rates have been a headwind as of late. Chubb can also grow earnings-per-share through share repurchases.
In February, the company added $1 billion to its share repurchase program, bringing the total authorization to $2.5 billion to be repurchased by the end of 2021. Overall, we estimate Chubb could grow book value by 5% annually over the next five years.
Competitive Advantages & Recession Performance
Chubb’s competitive advantages are its leading industry position, as well as its financial strength. First, Chubb is the world’s largest publicly traded property and casualty insurance company, and the largest commercial insurer in the United States. It has a dominant position across its product categories, which helps it to retain customers.
It is also in strong financial position. Chubb is rated AA from Standard & Poor’s, and Aa3 from Moody’s, the major U.S. credit ratings agencies. Its healthy balance sheet and high credit rating provide the company with financial strength that helps retain clients and invest for growth.
The insurance industry can be cyclical. As the economy strengths, people tend to have more discretionary capital that can be used to add to their insurance policies. If the economy weakens, customers may pull back on their spending. This occurred during the Great Recession for Chubb.
- 2007 earnings-per-share of $8.07
- 2008 earnings-per-share of $7.72 (-4.3% decrease)
- 2009 earnings-per-share of $8.17 (5.8% increase)
- 2010 earnings-per-share of $7.79 (-4.7% decrease)
- 2011 earnings-per-share of $6.96 (-10.7% decrease)
Although Chubb didn’t see quite as severe profit declines as many other financial firms, earnings-per-share did experience some variability. However, Chubb remained highly profitable during the Great Recession, which allowed it to continue raising its dividend even through the steep economic downturn. Chubb also remained highly profitable in 2020, even during the coronavirus pandemic.
While earnings-per-share haven’t grown much in the last decade, the company’s book value has increased nearly each and every year, with the only exception being 2015.
Valuation & Expected Returns
Using Chubb’s most recent share price of ~$169, along with expected earnings-per-share of $11.50 and $143 per share in book value for 2021, the security is currently trading at a price-to-earnings ratio of 14.7 and a price-to-book ratio of 1.18.
We believe that valuing Chubb solely through the lens of earnings-per-share does not paint the full picture of the company’s worth. In addition to earnings-per-share, investors should also consider book value per share when thinking about the valuation of insurance companies.
Our fair value estimate is a P/B ratio of 1.05 for Chubb stock. If shares were to revert to this average value by 2026, investors would see total returns reduced by -2.3% per year.
Taking the company’s expected growth rate (6%), dividend yield (1.9%) and potential book value multiple reversion (-2.3%) collectively leads to total expected returns of 5.6% per year over the next five years.
While Chubb is a well-managed and diversified insurance company with a long history of growing book value, we find the total projected return to be average. This is due to the high P/B valuation of the stock when compared to its 10-year average. The stability in a cyclical industry is noteworthy, as is the exceptional dividend growth record, but the current valuation makes the stock a hold, and not a buy right now.