Recent Buy: ACE

Nov 22, 2013: Bought 24 shares of ACE at $102.73 per share.

ACE Limited (ACE) is a holding company of the ACE Group, one of the largest multiline property and casualty insurers in the world. ACE opened its business office in Bermuda in 1985 and continues to maintain significant operations in Bermuda. ACE is now domiciled in Zurich, Switzerland. It operates in 53 countries, providing commercial and personal property and casualty insurance personal accident and supplemental health insurance, reinsurance and life insurance to a diverse group of clients.

ACE is a Dividend Contender with a 21-year streak of dividend increases. It pays quarterly dividends of $0.63 per share in January, April, July and October. Starting Yield on Cost is 2.45%.

ACE easily outpaced the S&P 500 over the last 10 years, more than doubling its 75% return:


ACE's earnings per share is rather sporadic, but, because dividends are more than adequately covered by earnings, ACE managed to grow its dividend steadily. Notice the recent acceleration in dividend growth:

Analysis of ACE

Fair value estimates for ACE range from $100.00 (MorningStar) to $134.60 (S&P Capital IQ), with a mean of $120.37. ACE is discounted by about 28.8% to the mean estimate.

The following table provides some key statistics for ACE:
The Chowder Dividend Rule requires that the sum of ACE's dividend yield and its 5-yr dividend growth rate exceed 12%. For ACE, the sum is 15.50%. ACE also passes the following of my selection criteria:

• Debt to Equity ratio is below 50% (22%)
• 7-year weighted average dividend growth rate is at least 7% (15.87%) 
• Price to Earnings ratio is less than 16 (10.14x and 11.56x)
• Dividend payout ratio is below 65% (21.59%)

ACE's estimated 5-year total payback percentage is 12.01%, somewhat less than my 16% target.

ACE appears in my November dashboard as a 6-star stock: (*******)

Other ratings for ACE

Zacks Rating  2 Buy  S&P Capital IQ's Stock Report  (*****) Buy  MorningStar Rating  (*****)  The Motley Fool's CAPS Rating  (*****)  Thomson Reuters's StockReport+  (10/10) Positive

Concluding Remarks

I like ACE for several reasons. It has an established history of dividend growth and recently announced its intent to boost the dividend by 24%. In addition, ACE approved a share buyback program to repurchase $2b worth of shares in the next year. ACE plans to pay out around 30% of operating earnings to shareholders.

ACE has a strategy of expanding its global footprint and product offering through acquisitions. In the past few years, ACE has acquired stakes in companies in the USA, Indonesia, Mexico,  and Tunisia. These acquisitions are boosting premium growth, now at about 6.3% and rising, and should help ACE meet or exceed its long term ROE goal of 15% with two to three years.

ACE earns good scores with the credit rating agencies due to its earnings generating capability and stability. In turn, these favorable ratings inspire investor confidence in the stock and maintain creditworthiness in the marketplace.

ACE has a strong capital position. Since 2001, it has achieved double-digit compounded annual
growth in book value per share. Its debt-to-capital ratio is below 20%, providing adequate financial
flexibility to manage its businesses and to invest globally. At the same time, its strong capital and liquidity position enables ACE to enhance shareholders value.

Of course, ACE is in the insurance industry and has substantial exposure to losses resulting from natural and man-made disasters. Catastrophic events can compromise ACE's results. Expenses have been rising over the last few years, increasing nearly 6% year over year in 2013. This increase is primarily due to increase in losses and loss expenses and policy acquisition costs.

At a discount of nearly 30% to my fair value estimates, and considering its growth prospects and favorable treatment of shareholders, I feel ACE will be a good addition to DivGro.

24 shares of ACE represent $60.48 of expected annual dividend income, which increases DivGro's projected annual dividend income to $2,483.92.

ACE is the 19^th dividend stock purchase for DivGro.

Full Disclosure: Long ACE