2024-01-20 06:00:42 ET
Summary
- Universal Insurance Holdings rated Buy today, agreeing with the bullish consensus from SA analysts and Wall Street.
- The bullish thesis is driven by nearly 4% dividend yield, 10-year dividend growth, expected future insurance customer growth, and earnings improvement, despite a net loss.
- Equity growth is healthy and their cash position too, while the share price is trading only just 7% above its moving average.
- A notable risk is interest rate risk, as over 92% of their asset portfolio is tied to fixed-income.
Thesis Summary
I'm calling this stock a buy as it is nearly 4% dividend yield while also showing not only YoY revenue and earnings growth but also I expect future growth due to new customer growth in their core region. It also shines in equity, returning capital to shareholders, and is trading only single percentage points above its moving average right now.
The rest of this note below goes into more detail, using multiple data points to support this thesis.
Stock & Industry Snapshot
As we come into the home stretch this trading week, for my readers I wanted to find a relatively under-covered stock for under $20 that also pays a competitive dividend yield.
After some digging, I found myself back in the insurance sector again, and today will be talking about Universal Insurance Holdings ( UVE ).
Though this stock may not be getting blasted across major financial media daily, here are some quick facts you may not have known, from its official profile on Seeking Alpha:
It trades on the NYSE, is headquartered in Florida, in business since the 1990s, and covers multiple insurance segments such as homeowners, renters, liability, as well a reinsurance solutions.
Insurance falls under the larger financials sector, and from what I found in market data it seems the sector is doing better on a 3 year basis than in the first month of the new year:
The business model of an insurance company is easy to explain: collect a ton of cash in policy premiums each year, manage risk well so that you have much less getting paid out in claims than what comes in, and after business expenses you invest all the extra cash into an asset portfolio, usually fixed-income securities that earn interest, but also a mix of other assets perhaps.
Equities Analyzer
Our Equities Analyzer Dashboard looks at this stock across 8 metrics such as revenue and earnings growth, equity and dividend growth, dividend yield vs peers, and valuations (P/E and P/B ratios).
With our focus leaning towards use of accounting statements , in today's research note we will refer to data sources such as the income statement , balance sheet , valuation data , dividend data , the price chart on yCharts, and the company's own Q3 earnings release from October. (their next earnings expected on Feb. 26th in about a month).
Here is our dashboard for this stock, comparing YoY growth in key metrics, as well as share price vs its moving average, and dividend yield vs peers.
Revenue Growth
What we see from the dashboard data is that revenue grew +15% on a YoY basis.
Here is what the company said was a driver to this growth, according to their Q3 release:
The increase in core revenue primarily stems from higher net premiums earned and net investment income, partly offset by lower commission revenue.
Notable to mention also is the benefit of the high interest rate environment which helped drive income on their assets portfolio:
The increase primarily stems from higher fixed income reinvestment yields and higher yields on cash .
Looking beyond the Q3 figures, the sentiment I am getting from management comments is one of growth in the southeast US region:
As we look forward, we are more confident in the Florida market , which is our largest geography, and have started to slowly increase new business in additional territories.
From the combined evidence, in the category of revenue growth I call this stock a buy.
This is driven by their double-digit YoY revenue growth, along with new growth in their home state, and what I expect to be further tailwind to their asset portfolio as we can expect the current interest rate environment to stay put for a while, considering CME Fedwatch predicts with 97% probability the Fed will keep rates the same after their Jan. 31st meeting while only roughly 57% chance they drop rates after their march meeting.
Earnings Growth
Although net income (earnings) continued to post a net loss, on the bright side it is a major improvement since Sept 2022 and a +92% YoY growth.
From the income statement the trends I notice is that policy benefit claims are lower in all of the last 4 quarters vs Sept 2022, while revenue being up.
Total operating expenses also saw a YoY decline, which gives a tailwind to net income.
Here is what the company had to say about earnings in their Q3 comments:
The improvement in adjusted net loss available to common stockholders mostly stems from better underwriting income and net investment income.
The region this company is in, Florida / southeast US, happens to be a major target for hurricanes and tropical storms, and from my own experience I know the impact this could have on property damage particularly between August and November each year.
Fortunately, a major hurricane named Idalia did not have such a major business impact in Q3:
The storm's severity appears considerably smaller than initially anticipated and is comfortably absorbed within our retention.
Looking ahead, I know it is impossible to predict with certainty too far in advance where a major storm will hit and the level of property damage it could cause, so this is a necessary risk to assume when investing in this business, the risk that in any given time of the year there could be a major catastrophic natural event that causes policy claims to skyrocket.
At the same time, I know there is demand for solutions like renters insurance because landlords often require it to sign a lease, and condo insurance because your lender may require it before giving you a home loan. This creates a natural market demand for a company like this, despite the fact that other competitors exist.
Consider that its home market of Florida has seen steady growth in residents in the last few decades, according to data from Statista :
From the combined evidence, I call this stock a buy.
This is based on significant improvement to the YoY net loss, as well as expected growth in the top-line which will help the bottom line too.
Equity Growth
Because this is much smaller insurance company than let's say Chubb ( CB ) or AIG ( AIG ), I am interested in whether this company shows positive equity and can grow it each year.
The balance sheet data tells us equity grew nearly +16% YoY.
Related to this category is whether the company has the financial capacity to return capital back to shareholders, and the data shows it does.
In their Q3 comments, they indicated
Company repurchased approximately 894 thousand shares at an aggregate cost of $12.3MM. On July 20, 2023, the Board of Directors declared a quarterly cash dividend of 16 cents per share of common stock.
The company also shows between $300MM - $380MM in cash, and around $2.5B in total assets along with $2.25B in total liabilities, leaving just around +$300MM in equity.
I call this a buy , on the basis of double-digit equity growth, and a strong balance sheet.
Dividend Growth
Next, particularly if you're a dividend-income investor like me you may care about dividend growth over a longer period, say 10 years.
The data from the dividend growth shows that the annual dividend went from $0.55/share in 2014 to $0.77/share in 2023, for a +40% growth in a decade.
Notable to mention, from the dividend history , is that in addition the regular quarterly dividends this firm also pays out a "special" dividend each year. For instance, it was $0.13/share in December.
I find few companies paying a special dividend, so when I do I like to mention it here.
As for future dividend hikes in 2024, I think we may have to wait until profitability returns but otherwise the cash flow at this company is positive.
When it comes to dividend growth I would call it a buy.
Share Price vs Moving Average
Here, let's take a look at the latest share price data vs its 200 day SMA:
The most recent share price of $16.56 is around +7% above its 200 day SMA, and around $4/share above its autumn lows around $12, yet still way below its May highs.
So, the share price is just a single-digit percentage above its average, while both revenue and earnings have seen double-digit percentage growth.
This I think still presents a buy opportunity at this price, because I would argue that the share price is not far above its moving average yet I am getting a company with revenue and earnings growth, but also dividend growth as we've seen.
Dividend Yield vs Peers
Besides dividend growth over a decade, what I look for is what kind of yield I will get on the capital invested.
Today I did a comparison of this company's forward dividend yield of 3.86% vs its sector and two insurance peers, Allstate ( ALL ) and Progressive ( PGR ) who both are heavy in the insuring of property.
Universal Insurance and its yield which is nearly 4% beats the sector average by a few points, and its peer Allstate whose yield is 2.33% while Progressive is at 0.24%.
I call this a buy at this yield, which to me seems a no brainer, as it beats both its sector and two major peers.
Valuation: P/E Ratio
What I could get from valuation data is the forward P/E of 9.30 is below the sector average of 10.76.
Relating this valuation back to the share price and earnings data, we know that the share price is +7% vs its SMA yet earnings climbed 92% YoY.
Therefore, I call it a buy at this valuation because of the tight gap between share price growth and earnings growth. Had it been a case of climbing share price yet earnings continued their decline, then it would appear overvalued.
More importantly, looking ahead I already mentioned I expect positive earnings growth and a return to profitability, driven by regional growth in customers.
Valuation: P/B Ratio
Another valuation metric is the P/B, which I think is great as it shows the gap between what the market is willing to pay for this stock and its book value(equity).
We see the forward P/B is at 1.59 for this stock, above the sector average of 1.13.
Relating this to share price and equity growth, we know the share price is +7% vs its moving average and equity growth is +16% YoY.
Equity, however, is not that high to begin with at just around +$300MM.
So, here I am on the fence with this one, and will call it a hold , due to climbing share price and low book value.
Key Risks
With this being an insurance company who invests quite a bit of extra cash into a large asset portfolio, the risk I see is asset risk exposure.
Here is a breakdown of their portfolio:
This firm shows around $1.1B in total invested assets, almost 93% of which is tied to fixed-income. I won't talk about real estate exposure since it is less than 1% of the portfolio, so would not make a huge impact either way I think.
Equities are around 7% of the portfolio.
Just from researching this topic for my Seeking Alpha articles in the last year, I know there is interest-rate risk when holding a significant portion of assets in f fixed-income like bonds, treasuries, etc.
Also, if the Fed starts dropping interest rates later this year, it could boost the value of bonds, as bond values and rates move opposite each other, but also it could mean less interest income on those types of assets and lower yield.
Therefore, I would call this stock a hold in this case, as in my opinion they are overly exposed to one asset class, and not enough perhaps in equities.
Wrapup and Rating
To summarize, I am rating this stock a buy today based on the holistic score in my score matrix below.
It saw strength in 7 categories, and a more cautious tone on the price-to-book valuation as well as the asset-risk exposure.
For further details see:
Universal Insurance: A 4% Dividend Yield Gem With Revenue Growth, For Under $20