Each year, U.S. News names seven stocks — from a universe of 4,000 or so — that look primed to outperform the market in the coming year. Travelers Companies Inc (NYSE: TRV), the property and casualty insurer, is one of those elite few, and was named one of the seven best stocks to buy for 2018.
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Here’s a quick look at Travelers — its history, its business, and, most importantly, why TRV stock is a buy.
What is Travelers? Here’s what Travelers isn’t: It isn’t a Johnny-come-lately. The property casualty insurer has been around for over 160 years and has been a member of the blue-chip Dow Jones industrial average since 2009.
The company employs more than 30,000 people, and its main business is selling insurance to individuals and businesses. Home insurance, auto insurance, general liability insurance and workers compensation are just a few of the products Travelers offers.
By hiring the savviest actuaries, Travelers underwrites insurance policies en masse that, as a whole, will be profitable. Shareholders hope that underwriting gains exceed what they have to pay out, but that’s not always the case.
In addition to the gain or loss from underwriting policies, Travelers also has billions in investments. This is TRV’s bread and butter. Incidentally, this large pool of money, sitting around waiting for a home and hoping no major claims burn down its principal, is also how Warren Buffett turned Berkshire Hathaway ( BRK.A, BRK.B) into a household name.
Coming off a bad year. There were two insanely destructive hurricanes that hit the continental U.S. last year — and one that took out the power grid of Puerto Rico. On the West Coast, fires raged out of control in a large portion of California.
That hurt Travelers’ business, to be sure, just not as much as you might think.
Hurricane Harvey, Hurricane Irma and Hurricane Maria all happened in the third quarter. Harvey alone is currently considered to have been the most expensive natural disaster in U.S. history, with damages eclipsing $120 billion. Damages from all three storms could exceed $250 billion.
Travelers’ share of those losses was $455 million, or about $1.63 per share. But Travelers’ still managed to turn an overall profit in the quarter, registering a gain of $293 million. That’s a return of $1.05 per share for its investors despite hurricane, flood and fire damage.
[See: 7 of the Best Health Care Stocks to Buy for 2018.]
All this is to say: TRV stock is awfully resilient. If the day comes when Travelers posts even two straight quarters of losses, then there will be much bigger problems than the stock market.
Given how abnormally destructive 2017 was, the bar is set low, and 2018 should certainly be brighter.
Interest rates rising. Remember that pool of money Travelers gets to invest? That earned TRV $588 million in the third quarter alone last year. And the good news for investors is that the earnings power of that money Travelers has to hold in order to pay off claims is only going up.
Insurance companies love higher interest rates because that means they can earn higher rates with fixed income products.
And by all measures, 2018 figures to be a year of higher rates, with most Federal Reserve observers expecting three interest rate hikes.
Valuation, dividend, great financial position. Understanding the resiliency of Travelers’ business, the inevitability of a better year ahead and the tailwind that is higher interest rates should give you a good idea why this seems like a good business. But what about the stock?
TRV stock, too, looks fairly sound; shares trade for just 15 times earnings and 13 times forward earnings, both steep discounts to the Standard & Poor’s 500 index and even the Dow Jones.
On top of that, shares pay a 2.1 percent dividend, so shareholders are able to collect a tidy little stipend just for sitting around. That dividend is safe and sustainable, too: the company has increased its dividend payments for nine consecutive years, and with a payout ratio of just 32 percent, it’s got room to keep increasing for years to come.
There’s relatively little debt on the company’s books, and shares go for just 10 times free cash flow. A little debt isn’t a bad thing in the stock market, since it amplifies returns for equity investors.
Conclusion. TRV isn’t the most terribly exciting stock in the market. It’s arguably one of the most conservative picks on the U.S. News annual buy list, for that matter. With the company coming off a rough 2017 — not only did profits fall but shares underperformed the Dow by 14 percentage points and the S&P 500 by 9 percentage points — some may find this a boring investment.
That’s nothing to be ashamed of — every diversified portfolio can use a full dull names in its ranks.
“A company that does boring things is almost as good as a company that has a boring name, and both together is terrific,” Peter Lynch, commonly considered one of the best investors of all time, once wrote.
[See: 7 of the Best Dividend Stocks to Buy for 2018.]
Of this year’s top seven stock picks, Travelers shares don’t have the most upside potential — barring a surprise acquisition, you’ll never see this company skyrocket overnight. But with shares conservatively valued and paying a 2 percent dividend, you don’t have to be an actuary to recognize the attractive risk-reward on TRV.
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Why Travelers Companies Inc (TRV) Is One of the Best Stocks to Buy originally appeared on usnews.com
