L - Loews Corporation: Buy The Dip Hold The Course

2023-03-21 07:58:00 ET

Summary

• Loews Corporation has dipped down recently as CNA Financial has been affected and liquidity concerns have come into play.
• The company has an impressive portfolio of assets and we expect any downturn to be a part of long-term strength.
• The company has repurchased a substantial number of shares and we expect it to continue opportunistically repurchasing shares providing long-term returns.
• The company's diversification and the financial strength of its businesses are continuing to grow.

Loews Corporation ( L ) has seen its share price get caught up in the banking drop as its largest holding CNA Financial ( CNA ) has seen its share price drop by more than 16%. Despite that impact on its largest holding, Loews Corporation has a strong portfolio of assets and as it continues to invest at its $12.5 billion valuation, we expect strong long-term returns.

Loews Corporation Overview

Loews Corporation has a diversified and impressive portfolio of assets.

Loews Corporation has a number of businesses, the largest of which is the publicly traded CNA Financial which has had its stock price suffer with the recent downturn. Still, the business has a dividend of just under 5% and a market capitalization of roughly $10 billion at the present time. Loews Corporation's holding entitles it to $450 million in annual dividends based on CNA Financial's 4.5% dividend yield .

The company also has several exciting privately held businesses. This includes Brookfield Pipelines, Loews Hotels & Co, and Altium. While some might be difficult to land they continue to generate strong direct profits for the company while providing its business with strong diversification. These businesses continue to grow.

More importantly, the company's share repurchases continue to increase your holdings of these businesses.

Loews Corporation Financials

The company's financials have remained strong but still require a great deal of effort on the company's part to drive returns.

The company has $3.2 billion in cash and investments although the much more relevant number is the company's $0.9 billion in net cash. That's equivalent to almost 10% of the company's market capitalization and forms a basis for the company. It enables the company to both chase new investments and weather storms in the market.

The company has continued to earn massive dividends from its subsidiaries, forming the basis of strong shareholder returns outside of other retained capital. In 2022, those dividends were almost $1 billion and we expect them to remain strong. On top of strong finances here, the company has earnestly repurchased shares.

The benefits there might not be evident to the company's common stockholders who haven't seen significant appreciation. But the company's book value per share has grown substantially. Additionally, the company has managed to reduce its shares outstanding from 312 to 236 million in a mere 5 years, an incredibly strong reduction.

We expect the company's strength to continue.

CNA Financial

Despite its attempts to diversify, it's worth talking about CNA Financial as it is the largest holding of Loews Corporation.

CNA Financial is an insurance company. The company has seen its share price suffer along with those of other financial firms as part of the fallout of the failure of SVB. The company's share price is $38 and its book value is $32.58 implying a reasonable share price to book value ratio of ~1.15. The company has a high single digit ROE with ~$1 billion in annual net income.

The company's combined expense ratios for its various business lines have been <100% which is what you want to see in insurance businesses before counting the impact of the float. The company is benefited here from rising interest rates with a 4.5% effective yield on its assets and >$2 billion in annualized pretax net investment income.

The company's total portfolio has a weighted average duration of 6.6 years with a 95% investment grade. The company has some substantial unrealized losses from rising interest rates, however, we expect that if rates remain high, as investments rollover this loss will decline and interest income will increase. That represents a double-whammy source of strength for the company's balance sheet and shareholder returns.

Given Loews Corporation's substantial holdings that represent potentially growing dividends for Loews Corporation as well.

Loews Hotels

A bright spot in the company's portfolio that earned $1.6 billion in EBITDA last year and is providing growing diversification is its hotels division.

The company's hotel business currently consists of just over 16,000 rooms and it's continuing to grow to a total of 19,000 rooms counting those under development. The company is a partial operator in many of these businesses; however, it's still worth noting the 10% growth. At the same time, many of the company's hotels are becoming a part of the luxury segment.

While sometimes black swan events affect multiple sectors of the company's business such as the impacts on both oil and the hotel business from COVID-19, overall, the company's business remains strong. Hotels represent another source of diversification from both energy and the company's core financial holdings along with other businesses.

We expect profits from this division to grow and contribute to the company's earnings. A spin-off here could bring substantial direct value and put a true value on the division.

Shareholder Return Potential

Overall, we expect Loews Corporation, like many other diversified companies, to continue generating strong returns but not direct returns.

The company's dividend is modest at just under 0.5%. However, the company has managed to repurchase roughly 6% of its outstanding share count for each of the last 5 years. We expect it to continue to opportunistically repurchase shares growing its book value and direct shareholder returns. The longer its share price remains lower, the stronger the potential.

Overall, backed by dividends and value growth, we expect double-digit shareholder returns.

Thesis Risk

The largest risk to our thesis is a general market downturn. The company has a diversified portfolio of assets but it's been aggressively repurchasing shares and it's still susceptible to what happens in the broader market. A downturn could substantially harm its earnings and its ability to drive additional returns for interested investors.

Conclusion

Loews Companies' stock price continues to stagnate. It recovered well from COVID-19 going into 2022; however, from that point, it took a substantial hit along with the broader market. Now, especially given the company's continued substantial share repurchases, it represents quite a unique opportunity in our view.

The company continues to generate massive dividends from its holding companies. Those dividends totaled almost $1 billion last year. We expect minimal direct returns but more substantial share repurchases that increase ownership in the companies that the company holds. Overall, that makes the company a valuable investment.

Let us know your thoughts in the comments below.

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