Chubb Ltd (CB): A Conservative Dividend Grower in the Insurance Industry

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Prior to the merger, CB had above average dividend growth potential with a Dividend Growth Score of 69. Prior to acquiring CB, ACE had increased its dividend for 22 consecutive years, and CB was already a dividend aristocrat with 33 consecutive dividend raises.

While the company will be busy with integration work over the next several years, the merger is expected to add to the company’s earnings immediately. We expect another dividend increase in 2016 and believe it will be at a low- to mid-single digit rate. Before the deal, ACE had been growing its dividend at a low-single digit rate, choosing to invest most of its cash in acquisitions. CB had grown its dividend at a double-digit clip in recent years.

Valuation

Chubb Ltd (NYSE:CB) trades at 11x forward earnings and has a dividend yield of 2.4%. We believe this business can grow sales at a low-single digit rate (legacy ACE compounded sales by 3.5% per year over the last five years) with earnings per share growing by 6-8% per year driven by cost synergies and operating leverage.

Under these assumptions, CB’s stock appears to offer annual total return potential of 8-10% per year. We believe the company is reasonably valued, especially given its high business quality. However, a lot of the company’s value admittedly rests on the long-term outcome of the merger.

Conclusion

ACE’s merger with CB comes with numerous integration risks, but it also creates opportunity for two blue chip dividend stocks to become an even greater force in the P&C insurance market for years to come. We expect the combined company to generate consistent dividend growth for many years and are happy to bet on such a disciplined, conservative management team.

Disclosure: None