Ace
ACE Limited (NYSE:ACE), one of the world’s largest multiline insurance providers, boasts dividend growth potential, following an increase in the company’s dividend by 4.1% in May. As a result, the current yield stands at 2.3%, while its payout ratio is low at 25% of the current-year EPS estimate. However, it should still be considered that the company’s strategy to grow through acquisitions could claim a notable portion of available cash flow to fund expansion. The long-term profitability outlook for the company is positive, as analysts see its long-term EPS CAGR at 8.1%. For the reference, the company’s net written premiums grew 5% last year, while adjusted diluted EPS was up 12%.
This insurer has a strong competitive position in its industry, characterized by operating outperformance relative to its peers and a focus on underwriting discipline. Its operating ROE has been consistently higher than the comparable metric for its peers on average. (The company targets a long-term ROE of 15%, which it is expected to reach within 2 years.) On the other hand, its P&C combined ratio has been consistently lower than that of its peers on average.
Operating in 53 countries, Acehas a broad geographical reach and offers a diversified portfolio of products, which adds to its strength. While low interest rates and rising operating expenses have weighed on the insurer’s financial performance in recent years, the prospect of rising interest rates provides some support to improved investment income outlook for the upcoming period. It also lends support to expectations of a higher ROE. In fact, every 100 basis points move in its portfolio book yield is worth almost 2 points of ROE.
The company’s strategy has been to channel excess cash into reinvestments, including acquisitions, instead of share buybacks. Therefore, the company has grown in scale and scope, with very accretive acquisitions that have been supporting ROE expansion. Still, as of the end of the first quarter, the company had some $307 million in share buyback authorizations. Moreover, the company has been building shareholder wealth through growth in book value, which increased by nearly 360% over the past decade. ACE Limited (NYSE:ACE)’s focus on growth, including both organic and acquisitive growth, with robust ROE targets, points at potential for continued future outperformance.
Final thoughts
Yields on Treasuries have now started to rise, increasing the appeal of these low-risk fixed-income investments. However, the prospect of moderately rising inflation still makes the case for dividend growth investing. The aforementioned companies—Ford Motor Company (NYSE:F), ACE Limited (NYSE:ACE), Walgreen Company (NYSE:WAG), Norfolk Southern Corp. (NYSE:NSC) and Whirlpool Corporation (NYSE:WHR)—each represent intriguing situations worth watching, and their support from mutual funds warrants closer inspection. Discover the secrets of another “smart money” strategy here.
Disclosure: none
