ORI - Old Republic: An Old Reliable Income Generator

Summary

• Old Republic International has a long track record of shareholder returns.
• While it's been pressured by the down housing market, it's making the moves to emerge as a stronger enterprise.
• Income investors may want to consider a position in ORI at its current below average valuation.

Dividend aristocrats come in all shapes sizes and forms, and doesn't always have to be popular stocks like Coca-Cola ( KO ). This includes the old reliable Old Republic International ( ORI ), which has paid shareholders an uninterrupted and increasing dividend for decades. In this article, I highlight what makes ORI an attractive income pick, especially with the S&P 500 ( SPY ) again yielding a paltry 1.6%.

Why ORI?

Old Republic is a Chicago-based Fortune 500 company that's been in business for over 90 years. It offers a variety of insurance products, including property and casualty, title, and surety. ORI’s general insurance ranks among the 50 largest in the U.S., and the title insurance operations are the third largest in the country.

One of the things makes Old Republic appealing is its long history of paying and increasing its dividends. The company has increased its dividend for 42 consecutive years, which is an impressive feat in and of itself. Moreover, it's paid an uninterrupted dividend to its shareholders (no cuts or suspensions) for over 80 years.

While ORI has an impressive history, that doesn't make it immune to current headwinds in the housing industry, given ORI's reliance on the title insurance business associated with new home purchases and mortgage refinances. This is reflected by title insurance pretax operating income declining by 46% YoY, while general insurance saw better results, with pretax operating income rising by 15% YoY during the third quarter.

While the current environment isn't conducive for Old Republic's title insurance business, it important to keep in mind that this company has been through multiple economic cycles in its storied history and that the business is managed for the long run, as reflected by management comments regarding the diversified business during the last conference call :

Our 2022 expectations for Title Insurance are considerably less than those expectations of the record-setting 2021 year. We think this downturn in Title Insurance and the continuing upturn in General Insurance reinforces the benefits of our long-standing diversification strategy anchored in the non-correlated P&C in Title Insurance segments, which provides for steadier earnings and shareholder returns over the long run.

Moreover, ORI sees a healthy combined ratio of 91.4%, sitting just 160 basis points higher than the prior year period. For reference, the combined ratio is calculated by losses divided by earned premiums, so a ratio in the low 90s or lower is generally considered to be good.

Looking forward, ORI could emerge from the current headwinds in stronger form, as it's making investments into its digital platform to make title close processes simpler and more efficient, which could result in cost savings. This was highlighted during the recent conference call:

We'll continue to deliver on our technology road map and digital business plan with a focus on optimization by looking for improvements in productivity and existing revenue with better customer engagement with an automation focus.

This balances between improvements in our current business portfolio and workflow while preparing for future changes in transformations. An important achievement at RamQuest, our closing software entity, is the upcoming launch of Horizon, our new web-based and modern title and escrow platform. We see this as a key piece of our technology delivery strategy for our agents as well as our own internal modernization program for our direct operations.

Plus, I see potential for interest rates to ease, as this mortgage rates have already reflected this. As shown below, the 30-year mortgage rate has seen a steady downward trend since hitting the 7% level back in November.

Meanwhile, ORI maintains a strong BBB+ rated balance sheet and pays a respectable 3.8% dividend yield that's well covered by a 32% payout ratio. As noted earlier, ORI has a dividend aristocrat with a very long track record of paying an uninterrupted dividend. As shown below, ORI scores A and B scores for dividend safety, growth, yield, and consistency.

Lastly, the stock remains value priced at $24.40 with a forward PE of 9.5, sitting below its normal PE of 11.9 over the past decade. I see potential for the stock to trade at a PE of over 11x, should inflationary concerns and interest rate hikes ease or reverse. Analysts have a consensus Buy rating on the stock with an average price target of $27 , implying a potential one-year total return in the mid-teens.

Investor Takeaway

Old Republic International is a diversified insurance company with a long dividend track record, attractive valuation, and carries a respectable credit rating. The stock currently trades below its normal valuation and could benefit from easing inflationary pressures with an improvement in the housing market, and increased efficiency from its digital platform investments. For these reasons, dividend investors may want to consider initiating a position in ORI at present levels.

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