2023-07-03 02:48:40 ET
Summary
- Chubb rated buy today, in line with SA and Wall Street consensus.
- Positives are dividend growth, financial condition, interest income growth due to macro factors, and price trading below its 200-day SMA.
- Headwinds are its P/E and P/B valuations much higher than the sector average.
Research Brief
To kick off the July ratings month, I return to the insurance subsector of the financial industry to cover a major player in the insurance space, Chubb Limited ( CB ).
"Protecting the present and building a better future" is the slogan on its website , and notable items to mention about this company are that it is the world's largest publicly traded property & casualty insurance company, has nearly $200B in assets, is listed on the NYSE and is part of the S&P 500 index.
Our Rating Approach
Our goal is to find value buying opportunities for stocks in the financial & technology sectors that otherwise have strong financial fundamentals, and to present them here for investors using a simplified approach.
We use a 5 step holistic methodology breaking down our rating into 5 categories: share price, valuation, dividend yield, financial condition, & macro factors affecting the company. If the stock is recommended on 4 of the 5 categories, it gets a buy rating. 3 out of 5 would give it a hold rating. Less than 3 is a sell rating.
Then we compare our rating to that of both the Wall Street and Seeking Alpha consensus.
Share Price Below Moving Average
Below is the price chart for this stock with a market closing price of $192.56 on Friday June 30th:
Chubb - price chart on 30June ( StreetSmart Edge trading platform from Charles Schwab)
I am tracking the 50 day simple moving average (blue line) and the 200 day SMA (red line). I highlighted in yellow my recommendation for a buying price "range" that I would consider. My portfolio strategy used is dip buying, where the price falls within a range below both its 50 day and 200 day averages, after a death cross formation, which the chart above shows already occurred in April.
In my own experience as a home-based trader with own capital, I often have bought into dips when the company otherwise had strong fundamentals. In the short-term, the results were mixed, but in the longer term there were steady returns on capital in the forms of dividends, call options sold, and capital gains. I believe more savvy investors will also recognize the fundamentals and help drive Chubb's share price back up again over the next year.
Another SA analyst, Brad Thomas , make a similar point in his March analysis of this stock. According to him, "over 30+ years, 97% of stock returns are a function of pure fundamentals, not luck."
With that said, I would recommend this stock based on the current price range, which appears to be a buying opportunity.
Valuation Much Higher than Sector Average
Based on Seeking Alpha data on valuation, I am tracking the GAAP-based forward price to earnings (P/E) and price to book (P/B) ratios, as I believe these are two vital metrics for finding overvalued or undervalued stocks. The benchmarks I compare against are the median ratios for the sector this company is in.
For Chubb, its P/E is 10.55, which puts it around 16% above the median for its sector. Its P/B is 1.39, which puts it almost 47% above its sector median.
From this data, I would not recommend this stock as it appears overvalued on these two metrics, vs its sector median.
By comparison, another insurance giant, Prudential Financial ( PRU ), has a forward P/E of 6.80 and forward price to book of 0.98, so much more undervalued in this category and one I would pick, and have covered before.
Dividend Growth Positive and Yield Competitive among Peers
Using Seeking Alpha dividend info , I am tracking the current dividend yield as of July 1st for this stock, which is 1.79%. Its dividend of $0.86 per share does not have any immediate ex dates coming up soon.
Notable to mention about their dividends is a positive 5 year growth rate:
Chubb - 5 year dividends growth (Seeking Alpha)
The annual dividend went from $2.90 in 2018 to $3.29 in 2022, an over 13% increase. Being that I am an investor in dividend-income stocks myself too, this tells me that they have been reliable in returning capital back to shareholders.
It is important to compare against peers in the same sector, though. So I will use The Progressive Corporation ( PGR ) and The Allstate Corporation ( ALL ).
Progressive's current dividend yield is just a mere 0.30%, while Allstate's dividend yield is 3.26%.
Because Chubb's yield falls between the two, and has shown positive growth and reliable payouts quarterly, I would recommend this stock in the category of dividends. However, Allstate is also worth considering at over 3% yield, if you are building a portfolio of stocks in the insurance sector.
Financial Condition of Company is Strong
Next, I will touch on some key data highlighting the financial condition of the company.
At a high level overview, from its last Q1 presentation , four of the major ratings agencies rated this firm highly on financial strength:
Chubb - Q1 presentation - Ratings (Chubb - investor relations)
Diving deeper, its balance sheet has shown a positive stockholders equity going back many years, another sign that their assets are more than enough to cover liabilities.
Further, as an insurance company, it is also diversified across several streams of insurance premiums, as the following chart shows, which tells me that it is not overly dependent on one line of insurance only:
Chubb - premiums by product (Chubb - quarterly presentation)
Lastly, when I went looking for positive sentiment from company leadership, I got it. This is what CEO Evan Greenberg had to say in his Q1 earnings commentary, with some insight into Q2 as well:
In sum, we had a strong start to the year with good momentum heading into the second quarter. Overall, the fundamentals for our business are excellent. Looking forward, we are confident in our ability to continue growing revenue and operating earnings.
Therefore, in this category of financial condition I would recommend this stock.
Effect of Macro Factors on this Business
In this category, I will analyze the macro factors that either benefit or don't benefit this business.
One notable piece of data is their income statement , which shows that the interest and dividend income component of revenue grew steadily from March 2022 until March 2023:
Chubb - interest & dividend income (Seeking Alpha)
This period can be easily correlated against data in CME FedWatch which shows Fed rate hikes but also sentiment among rate traders, the majority of which seem to think another rate hike is coming at July's Fed meeting.
If they are right, and we know that Fed Chair Powell also hinted at more rate hikes, then this can continue to benefit firms like Chubb who hold interest-bearing assets.
According to recent coverage by Seeking Alpha, Powell "said that he believed more policy tightening was coming and hinted that the central bank would remain open to two straight hikes at coming meetings."
Hence, in terms of a favorable macro environment, I would recommend this stock.
Rating Score
This stock won 4 out of 5 categories I rated, so I am giving it a buy rating. This rating is in line with the consensus from SA analysts, the SA quant system, and Wall Street:
Rating consensus (Seeking Alpha)
The rating did not get a strong buy, however, because as mentioned earlier I think the P/E and P/B valuation metrics are too high vs its industry average.
Risks to our Rating Outlook
Risk analysis is a critical part of researching equities, so the risk I anticipate to my modestly bullish outlook on this company is investor concern over risk in its asset portfolio.
Those following my recent articles covering insurance stocks like MetLife ( MET ) and Prudential Financial already know that insurance companies invest a lot of their extra cash into income-generating assets. However, this also creates exposure to risk that those assets will lose value, creating realized or unrealized losses for the company and impacting quarterly results.
When it comes to Chubb, however, I would mention that their asset portfolio risk is actually being managed well for now.
This is supported by their own commentary in the Q1 presentation:
87% of Chubb’s investment portfolio is in fixed income securities, with an average credit quality of A (S&P) and A (Moody’s) and a duration of nearly five years. The portfolio’s asset allocation is well diversified across issuers, geographies, and sectors.
Chubb - fixed income portfolio (Chubb - Q1 presentation)
The above shows portfolio diversification, and no mention of exposure to commercial real estate or office properties, a risk topic that has come up often lately in comment discussions on Seeking Alpha.
Besides being diversified, the next question I had was what type of losses these assets had in the first quarter. It turns out, based on their supplemental financial info provided, that their asset portfolio actually had both realized and unrealized gains, not losses, in the first quarter, and the main driver of unrealized gains was the fixed income portfolio:
Chubb - Q1 - asset portfolio gains/losses (Chubb - Q1 financial supplement )
So, in terms of their risk profile, I would recommend this stock, however it is certainly important to see how these figures look for Q2 as well, whose results are right around the corner.
Analysis Wrap up
To recap, I give this stock a buy rating today. The recommendation is based on positives I highlighted on dividends, share price, macro environment, and financial condition of the company. Headwinds include the P/E and P/B ratios showing overvaluation compared to its industry.
From a forward looking perspective to the rest of 2023, with Q2 behind us and earnings season coming up soon, I think the next round of insurance industry earnings results will continue to paint a relatively resilient picture of what I consider a fairly resilient industry that continues to prove itself in the face of market storms & turbulent waters.
For further details see:
Chubb: Opportunity To Buy An Insurer In Strong Financial Condition