Old Republic International Remains The Conservative Choice For Income
Oct. 30, 2019 12:26 PM ET
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Summary
*There has been a number of senior appointments made over the past year at Old Republic International.
* The fundamentally conservative nature of this stock remains unaffected, however.
* It is undervalued at this time.
Old Republic International (ORI) had some changes made to its senior personnel, but what has not changed is that this insurance stalwart remains a steady and dependable income investment. Whether it is a buy or not at present will be addressed below.
In terms of new appointments, there has been a slew of news on that front. On 05/09/2019, Old Republic announced that Craig R. Smiddy, at that time President and COO of Old Republic International, would become President and CEO with effect from 10/01/2019.
The big shake-up was announced on 08/21/2019 when Stephen J. Oberst was promoted from President and CEO of the Risk Management Underwriting division to Executive Vice President, Terri E. Minik was named as Oberst's successor as President of Risk Management Underwriting while retaining her position as COO of that division.
Both Oberst and Minik will also serve in the CEO's senior policy-making office and will be joined by the company's Senior Vice-President and Treasurer W. Todd Gray in that department. All three assumed their roles with effect from 10/01/2019.
The final major appointment was announced on 09/23/2019 when it was reported that Aaron Jacoby would assume the role of Senior Vice-President of the Corporate Development and Finance department and would do so with effect from 10/10/2019.
Now, five appointments within one calendar year would at first glance suggest a fundamental shake-up in how Old Republic International operates is forthcoming. This was squashed right away by the firm's Chairman and CEO Al Zucaro, who stated on 09/23/2019 (when the appointments of Oberst, Minik, and Gray were announced) that the reasoning behind these appointments was the following:
"...they represent a continuing fulfillment of the Company's executive succession plans. They augur well for the continuity of long-established governance and operating practices, and for an orderly transition of executive responsibilities."
In short, the appointments were made to ensure that Old Republic International stayed on the same steady, conservative path that this insurance underwriter has charted hitherto, and it's foolish to argue against that this is the correct choice when confronted with the revenue and net income figures reported over the past five years...
Conservatism has been the hallmark of Old Republic International's success, and this approach extends to its balance sheet. With a net worth of $5.79 billion against long-term debt of $973.7 million, it is not fanciful to state that Old Republic International will be able to continue rewarding shareholders with consecutively rising dividends as they have for the last 37 years - a record that makes it a de-facto Dividend Aristocrat. The payout ratio of 30.20% makes that more likely still.
The likelihood stems from the fact that Old Republic International operates in the always-needed insurance sector. Just as people need food and drink, so too do they need insurance. Now, insurance is not a sector that has high barriers to keep competitors out, so to survive and thrive, you need to be long-established and have an institutionally conservative business model that can withstand economic downturns. Old Republic International has been in operation for 130 years, is one of the fifty largest publicly-traded insurance providers in the U.S., holds investments worth $14.18 billion, and was able to keep paying consecutively rising dividends during the Great Recession of the late-2000s. True, growth going forward will not be spectacular - projected EPS growth over the next five years is estimated to be 10.00% - but income is practically guaranteed.
What is not guaranteed, however, is whether Old Republic International is worth buying now. Currently, the stock trades in the low-$20 range with a price-to-earnings ratio of 9.12 and a dividend yield of 3.51%. The five-year average P/E is 12.02 and the five-year average dividend yield is 3.98%. These figures do not make clear at first sight what fair value is for Old Republic International.
First, if we divide the current P/E by the market's historical average of 15, we get a valuation ratio of 0.61 (9.12 / 15 = 0.61). Dividing the current share price of $22.40 by 0.61 gives us a fair value of $36.72, which suggests that Old Republic International is very undervalued at present. Second, if we divide the current P/E by the five-year average P/E (9.12 / 12.02), we get a valuation ratio of 0.76, and dividing the current share price by this ratio gives us a fair value of $29.47, which still suggests the stock is undervalued. Finally, dividing the five-year average dividend yield by the current dividend yield (3.98 / 3.51) provides a valuation ratio of 1.13, and dividing the current share price by this gives a fair value of $19.82.
Now, if we average these three figures together [(36.72 + 29.47 + 19.82) / 3], we get a fair value figure of $28.67 for Old Republic International, which suggests that the stock is undervalued by 28% at this time. So, in a market where bargains are few and far between, we have a solid, conservatively-run insurance underwriter with a strong balance sheet, decent revenue, and net income figures, and a stellar dividend track record now trading 28% below fair value. Many will dispute this conclusion as it has traded more cheaply in recent years, but I contend that Old Republic International is a buy at this time.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ORI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: DISCLAIMER: The author is not a financial professional and accepts no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures presented are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.
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