Friday, February 21, 2020

I Also Trimmed CB

Earlier, I reported that I'd trimmed my Procter & Gamble (PG) position because it looks unlikely that PG will produce total returns in excess of 5%, whereas I'm looking for annualized returns of at least 8% from my DivGro holdings.

I identified another stock, Chubb (CB), with lower than expected growth prospects — at least when considering its unfavorable Chowder Number [CDN] of 5.

CB's dividend yield of 1.82% at $164.56 per share is on the low side and about 15% below its 5-year average dividend yield of 2.14%. Furthermore, CB's 5-year dividend growth rate [DGR] is quite low at 3%. To achieve annualized returns of 8%, a stock yielding less than 3% should have a CDN of at least 15, according to the Chowder Rule. For low-yielding stocks such as CB, CDN's less than 10 are unfavorable, meaning such stocks are unlikely to deliver annualized returns of 8% or more.

I decided to trim my CB position and to invest the proceeds in a higher DGR stock. This article details my CB trade.

Below is a table of DivGro stocks with unfavorable CDNs:

RankTickerCompanyYrsVL
Safety
Rank
VL
Fin. 
Stren.
M*
Econ.
Moat
S&P
Credit
Rating
SSD
Divi.
Safety
QualYield5-Yr
DGR
CDNFair
Val.
Price(Disc.)
Prem.
1JNJJohnson & Johnson571A++WideAAA99252.53%6.3%  9  152150.13(1%)
3MRKMerck91A++WideAA99252.95%4.6%  8  8982.65(7%)
4PGProcter & Gamble631A++WideAA-99252.37%3.1%  5  116126.149%
16INTCIntel61A++WideA+96241.96%7.0%  9  7167.27(6%)
24CVXChevron331A++NarrowAA85244.69%2.5%  7  128110.08(14%)
36KOCoca-Cola571A++WideA+80232.67%5.6%  8  5559.958%
40CBChubb261A+NarrowA99221.82%2.9%  5  168164.56(2%)
44VZVerizon Communications151A++NarrowBBB+87224.20%2.5%  7  6658.51(11%)
58XELXcel Energy161A+NarrowA-79212.31%6.2%  9U6570.268%

Procter & Gamble (PG) and Chubb (CB) have the lowest unfavorable CDNs of 5 each. I trimmed my PG position by 75% and I've decided to trim my CB position by about 52%. CB is a great dividend growth [DG] stock with a quality score of 22 and a Very Safe dividend according to Simply Safe Dividends. Which a streak of 26 years of higher dividend payments, the stock is a Dividend Champion and a Dividend Aristocrat

I'm not willing to bail on CB entirely, but I think holding a smaller than average position is more appropriate at this time. If CB offers a more favorable CDN in the future, I'll consider adding shares again.

Chubb (CB)


CB is the world’s largest publicly traded property and casualty insurance company with operations in more than 50 countries. The company offers commercial and personal property and casualty insurance, personal accident and supplemental health insurance, reinsurance, and life insurance to a diverse group of clients. CB was founded in 1985 and is headquartered in Zurich, Switzerland.

Below is a FASTgraphs chart of CB. The black line represents the share price and the blue line represents the calculated P/E multiple at which the market has tended to value the stock over time. The orange line is the primary valuation reference line. It is based on one of three valuation formulas depending on the earnings growth rate achieved over the timeframe in question. The Adjusted Earnings Growth Rate represents the slope of the orange line in the chart, which is quite low at 3.18%.


Source: FASTgraphs

It is evident that CB has a low growth rate and it is not expected to improve much given the projections in the chart. Furthermore, with the stock price above the primary valuation reference line, it appears that CB is now trading at a slight premium. Furthermore, CB's 5-year DGR is quite low at only 3%:


Source: Simply Safe Dividends

With the stock trading at the top of its 52-week price range, I think it is a good time to trim my position and to invest the proceeds in a higher DGR stock with a more favorable growth outlook.


CB Trade Summary


I bought 24 shares of CB in November 2013 and another 26 shares in July 2018. I decided to sell the 26 share batch and to retain the 24 share batch. Here is a summary of the trades and dividends received, along with a net profit analysis:

2018-06-20
Bought 26 shares of CB at $127.92 per share:
$
3,325.92
2018-07-13
 Dividend on 26 shares at 73¢ per share:
 $
18.98
2018-10-12
 Dividend on 26 shares at 73¢ per share:
 $
18.98
2019-01-11
 Dividend on 26 shares at 73¢ per share:
 $
18.98
2019-04-12
 Dividend on 26 shares at 73¢ per share:
 $
18.98
2019-07-12
 Dividend on 26 shares at 75¢ per share:
 $
19.50
2019-10-11
 Dividend on 26 shares at 75¢ per share:
 $
19.50
2020-01-10
 Dividend on 26 shares at 75¢ per share:
 $
19.50
2020-02-11Sold 26 shares of CB at $163.93 per share:$4,262.25
                                               
               

Capital Gain:
$
936.33

Dividends Received:
$
134.42

Commissions/Fees/Taxes:
$
2.09
Net Gain: $1,068.66

I made a net gain of 32.1% on the original amount invested, which is a gain of 19.5% annualized.

Selling these shares reduced DivGro's projected annual dividend income by $78.

Remaining CB Shares


Here is a summary of trades and dividends of the remaining batch of 25 shares, as well as an analysis of unrealized gains:

2013-11-22
Bought 24 shares of CB at $102.73 per share:
$
2,465.40
2014-01-31
 Dividend on 24 shares at 63¢ per share:
 $
15.12
2014-04-17
 Dividend on 24 shares at 63¢ per share:
 $
15.12
2014-08-13
 Dividend on 24 shares at 65¢ per share:
 $
15.60
2014-10-21
 Dividend on 24 shares at 65¢ per share:
 $
15.60
2015-01-05
 Dividend on 24 shares at 65¢ per share:
 $
15.60
2015-04-22
 Dividend on 24 shares at 65¢ per share:
 $
15.60
2015-07-21
 Dividend on 24 shares at 67¢ per share:
 $
16.08
2015-10-21
 Dividend on 24 shares at 67¢ per share:
 $
16.08
2016-01-21
 Dividend on 24 shares at 67¢ per share:
 $
16.08
2016-04-21
 Dividend on 24 shares at 67¢ per share:
 $
16.08
2016-07-21
 Dividend on 24 shares at 69¢ per share:
 $
16.56
2016-10-21
 Dividend on 24 shares at 69¢ per share:
 $
16.56
2017-01-20
 Dividend on 24 shares at 69¢ per share:
 $
16.56
2017-04-21
 Dividend on 24 shares at 69¢ per share:
 $
16.56
2017-07-21
 Dividend on 24 shares at 71¢ per share:
 $
17.04
2017-10-20
 Dividend on 24 shares at 71¢ per share:
 $
17.04
2018-01-19
 Dividend on 24 shares at 71¢ per share:
 $
17.04
2018-04-20
 Dividend on 24 shares at 71¢ per share:
 $
17.04
2018-07-13
 Dividend on 24 shares at 73¢ per share:
 $
17.52
2018-10-12
 Dividend on 24 shares at 73¢ per share:
 $
17.52
2019-01-11
 Dividend on 24 shares at 73¢ per share:
 $
17.52
2019-04-12
 Dividend on 24 shares at 73¢ per share:
 $
17.52
2019-07-12
 Dividend on 24 shares at 75¢ per share:
 $
18.00
2019-10-11
 Dividend on 24 shares at 75¢ per share:
 $
18.00
2020-01-10
 Dividend on 24 shares at 75¢ per share:
 $
18.00
2020-02-14Own 24 shares of CB at $164.56 per share:$3,949.44
                                               
               

Unrealized Capital Gain:
$
3,949.44

Dividends Received:
$
415.44
Net Unrealized Gain: $4,364.88

My unrealized gain is 77.0% on the original amount invested or 12.4% on an annualized basis. 

Concluding Remarks


CB is a strong DG stock with a long track record of dividend growth, a good quality score, and a very safe dividend. Given CB's unfavorable CDN, it appears unlikely that CB will produce total returns in excess of 5%, so I decided to trim my position by 52% and to wait until the stock offers a more favorable outlook.

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4 comments :

  1. Interesting move. I like property and casaulty insurers when they underwrite a profit. You can pay too much but they are usually cheap for the growth in book value they are capable of thanks to investing a profitable float. It is basically an uncallable margin loan with a negative interest rate.

    My tIRA is now almost entirely in insurance and its doing great on average.

    ReplyDelete
    Replies
    1. Thanks for commenting and I appreciate your perspectives. As mentioned here, I'm looking to improve DivGro's growth prospects, and CB (from where it is trading now) looks less likely to deliver the total returns I'm looking for. We'll see how it goes.

      Take care and happy investing!

      Delete
  2. What happened to your SKT position ? Gone as well ?

    ReplyDelete
    Replies
    1. Yes -- I'm behind with my blog posts after some portfolio reorganization. SKT just didn't fit with my goals anymore and I decided to take the capital loss. It will offset some of the capital gains I made from other sells come tax time.

      Delete

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