2023-03-31 09:23:01 ET
Summary
- Bank of America recently upgraded the W. R. Berkley Corporation from "hold" to "buy.
- WRB offers a growing dividend with the potential for significant capital appreciation.
- WRB's free cash flow and anemic payout ratio make for a safe and reliable dividend moving forward.
Investing Thesis
Despite a selloff earlier this month, Bank of America upgraded the W. R. Berkley Corporation ( WRB ) from "hold" to "buy." While I had heard some rumblings about the company representing an under-the-radar dividend opportunity, I had not really looked into it until I saw the upgrade since I already have significant exposure to the insurance space and the financial sector in my portfolio. But the upgrade caught my attention and I decided to take a look at W. R. Berkley from the perspective of a dividend growth investor seeking a reliable, growing income stream.
Business Overview
For readers unfamiliar with the company, the W. R. Berkley Corporation is an insurance holding company with global operations in property and casualty insurance products for businesses, individuals, as well as other insurance companies. Founded in 1967 and headquartered in Greenwich, Connecticut, W. R. Berkley has grown into a Fortune 500 company with a market cap north of $16 billion. Through its various subsidiaries, including Berkley Regional Insurance Company, Berkley Accident and Health, and Berkley Life and Health Insurance Company, W. R. Berkley provides workers' compensation, general and professional liability insurance, commercial automobile insurance, and marine insurance products.
The W. R. Berkley Corporation is an insurance holding company that operates globally. It provides property and casualty insurance products and services to businesses, individuals, and other insurance companies. The company offers a wide range of insurance products, including commercial automobile, workers' compensation, general liability, professional liability, property, and marine insurance.
The company operates on a decentralized model, enabling its various subsidiaries to maintain significant control over underwriting and pricing. Since the company operates in a wide range of insurance industry segments, including technology, healthcare, energy, hospitality, and construction, the decentralized model allows each individual subsidiary to respond to the specific needs of its customers with product offerings catered to their unique needs.
How's the Dividend Look?
Back in January, Seeking Alpha contributor John Ball called W. R. Berkley "a money-printing machine" as a result of the company's steadily increasing free cash flow. Indeed, over the course of the past five years, W. R. Berkley has seen its free cash flow quadruple:
Meanwhile, the stock's share price climbed steadily during the same period. Moreover, W. R. Berkley has significantly outperformed the broader stock market for the duration of the current bear market:
As an income investor, I tend to look at increasing cash flow and a steadily climbing share price as potentially indicating a good dividend growth stock. At first glance, W. R. Berkley's dividend is nothing to write home about, as it has only cracked the 1% mark once during the past five years, at the height of the coronavirus pandemic sell-off:
At 0.65%, W. R. Berkley's current yield appears to pale in comparison with the yields on offer from many other companies in the financials sector more broadly and the insurance space more specifically. Indeed, W. R. Berkley's quarterly dividend payouts appear not to have grown over the past several years:
Q1 | Q2 | Q3 | Q4 | |
2019 | $0.15 | $0.11 | $0.11 | $0.11 |
2020 | $0.11 | $0.12 | $0.12 | $0.12 |
2021 | $0.12 | $0.13 | $0.13 | $0.13 |
2022 | $0.13 | $0.10 | $0.10 | $0.10 |
2023 | $0.10 |
At first blush, it seems that W. R. Berkley's quarterly payouts amounted to $0.48 in 2019, then dropped to $0.47 in 2020 before climbing to $0.51 in 2021. It dropped back to $0.43 last year and appears to be yielding even less this year.
However, focusing on the quarterly dividends is misleading since the company has undergone two 3-for-2 stock splits in that same five-year span. Thus, 100 shares in 2019 have grown to 225 shares today, meaning that someone who owned 100 shares in 2019 collected $15 in dividends during the first quarter of that year and, presuming they have not sold any shares since then, will have collected $22.50 this quarter. During the same time span, a roughly $3,000 investment would have grown to nearly $14,000 today, without reinvesting the dividends.
Moreover, W. R. Berkley has consistently paid special dividends. In 2019, the company paid two special dividends worth a combined $1.25. In 2021, two additional special dividends resulted in shareholders receiving an additional $1.50 per share. Last year, there was another $0.50 special dividend and yet another earlier this year.
With a payout ratio under nine percent, the current dividend appears quite safe and has substantial room to grow while the company has shown a clear desire to return value to shareholders in the form of generous special dividends. Indeed, that "drop" to a dime last year was actually a 15% dividend hike and, given the low payout ratio, it looks very likely to jump another 10-15% in June 2023.
A Note of Caution: The Potential Impact of the Wealth Effect
Earlier this month, Bank of America identified W. R. Berkley as one of the stocks that could be particularly susceptible to a stronger wealth effect. This phenomenon occurs when the value of the assets an individual or organization holds increases. Essentially, we feel wealthier and spend money more confidently (and on more discretionary purchases) when we feel that our assets have gained value. When applied to the stock market, the wealth effect can influence investor behavior in a similar fashion and, as a result, impact share prices. Put differently, when the stock market experiences growth, investors feel wealthier and more secure in their investments, which often results in buying more stock which, in turn, increases demand for the equities and pushes share prices higher. Of course, the converse is also true: if the stock market experiences a downturn, investors lose confidence and the demand for stocks decreases and the price of equities drops. Bank of America considers W. R. Berkley to be one of the companies most likely to "feel the pinch of declining wealth and consumption" since it shows a particularly strong "positive correlation between sales growth and S&P 500 ( SP500 ) market returns (NYSEARCA: SPY ) ( IVV ) ( VOO ) and consumption growth" over the past two decades. Thus, for those bearish investors who sense the current bear market may persist for some time yet, it may be worth thinking twice about buying W. R. Berkley if price depreciation is a concern.
Concluding Remarks
W. R. Berkley strikes me as an appealing long-term investment. Like Old Republic International ( ORI ), the company is a boring outfit in a boring industry that has quietly chugged along through thick and thin, spitting out dividends on a regular basis and raising them year-in and year-out while also returning capital to shareholders in the form of large special dividends. With a payout ratio in the single digits and substantial growth in free cash flow, I think W. R. Berkley should be on any dividend investor's radar. Despite the potential for the wealth effect to impact share prices in the short and intermediate term, buy-and-hold investors should rest easy with this dividend-payer in their portfolios.
For further details see:
W. R. Berkley Is A Growth Machine