Published on March 25th, 2022, by Quinn Mohammed
Mercury General (MCY) has increased its dividend for the last 33 years. It has been able to continue raising the dividend by issuing token penny increases annually.
However, the company frequently pays out more in dividends than it earns per share. Also, the company’s earnings are highly cyclical. Details such as these come from stock analysis, and this should always be performed diligently before purchasing high-yield stocks.
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In this article, we will analyze the insurance company Mercury General Corporation.
Mercury General Corporation is an insurance company and is primarily engaged in personal automobile insurance. They also operate in homeowners, renters, and business insurance. The company engages in writing insurance through 13 insurance subsidiaries in 11 states. The company was founded in 1961.
Their insurance policies are primarily sold through about 10,000 independent agents, who receive commissions. California made up 84% of the company’s direct premiums written in 2021, with other states making up the remaining 16%. And personal automobile insurance made up 68% of total direct premiums written in the year. Homeowners insurance followed at 20% of premiums written, with commercial automobile at 7%, and other lines at 5%.
Mercury General reported Q4 earnings results on February 15th. The company reported net premiums earned of $960 million for the quarter, a 4% increase over Q4 2020. Net premiums written also rose by 4% year-over-year, to $930 million. Adjusted earnings-per-share of $0.55 were a monstrous 82% decline from the prior year’s quarterly EPS of $3.01.
The company’s net investment income after taxes were flat year over year, at $30 million. Mercury General’s average annual yield on its investments declined slightly to 2.5%, compared to 2.8% during the previous year’s quarter.
For 2021, Mercury earned $4.48 in diluted net income per share. This was a 34% decrease compared to $6.77 in 2020, a year where Mercury had seen a large increase. It is expected that 2022 and beyond will be weaker years for the company, which is why earnings-per-share will likely drop again from it’s relative high point.
Mercury’s property and casualty insurance business has been highly cyclical. At certain times, the company enjoys high premium rates and underwriting capacity shortages. Yet at other times, the business is faced with price competition and excess capacity. Additionally, catastrophe losses come and go and at times weigh heavily on the company’s results.
Mercury is refocusing on U.S. States and particular lines of insurance business with the best opportunities for long-term growth. As a result, in 2021, the company stopped new business and halted renewing existing policies for commercial automobile insurance in Arizona, Georgia, Illinois, and Nevada.
During the COVID-19 pandemic, the company’s results flourished with small catastrophe losses and strong property insurance. However, higher losses for Mercury’s ordinary business are expected for this year.
While we believe the company’s long-term growth is intact, investors should be prepared for major gyrations in earnings. In the past, the company’s profitability has ebbed and flowed significantly.
Competitive Advantages & Recession Performance
Mercury believes one of their competitive advantages to be their thorough underwriting and claims handling process, which, according to them, is superior to their peers. Additionally, its agent relationships and marketing efforts of independent agents also provide a competitive advantage.
Mercury General has been able to finance its dividend thanks to cash flows, which come in above the net profits the company generates. During the Great Recession, Mercury remained profitable, which can be explained by two key reasons.
First, even during times when the economy is weak, people still need insurance for their cars, property, and other belongings. As a result, demand for Mercury’s offerings is not entirely reliant on the state of the economy.
Second, Mercury did not invest in high-risk assets prior to the financial crisis, and therefore was able to avoid the huge losses many other financial corporations were faced with.
Mercury overall is recession-proof, in part because insurance is often required to possess. But the company can be at risk for regional catastrophes, such as 2017’s California wildfires. And results can be highly cyclical from year to year.
Mercury General is anticipated to pay a $2.54 dividend in 2022. At the current MCY share price, the company has a high dividend yield of 4.7%. This is lower than the 5.0% average yield the company has possessed in the last decade.
This year, we anticipate the company will generate $3.50. As a result, Mercury has a forward payout ratio of 73%, which is a little high, but below it’s average payout ratio that has surpassed 100% many times in the last decade.
Still, even with the constant earnings gyrations, Mercury has managed to increase its dividend for a long time. The company has increased its dividend for 33 consecutive years, albeit at a minor increase rate of sub-1% in the last decade. The company’s cash flows have supported the dividend.
In the last decade, Mercury General has grown its dividend by 0.4% per year on average. We believe the company will continue raising the dividend with token increases. This will allow them to keep their dividend streak and continue it.
Mercury General operates in a highly cyclical business, and the company is anticipated to report earnings significantly below the two prior years in 2022. Still, the company’s payout ratio this year is better than it has been over the past decade on average.
Mercury General has increased its dividend for thirty-three years. But in the last ten years, the company has only increased its dividend by one penny per year.
The company today appears to be slightly overvalued, but the 4.7% dividend yield is enticing. We don’t see any immediate threat to the dividend, but this is a company that we believe must be monitored closely, due to its cyclicality.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them regularly: