Friday 15 August 2014

BUY: Catlin Group--Insurance for my portfolio

Price: 517.3
Shares: 100
Projected annual dividend return: £31

Here we go again. After the flurry of purchases of GSK in July I have been a little quiet. However, with the arrival of new funds, I have a new purchase to declare. This time it is the speciality insurer, Catlin Group.

I have wanted to add an insurer to my portfolio for some time. However, in general I wanted to shy away from life insurers. One of the few such insurers which caught my eye was Old Mutual. They caught my eye chiefly due to their diverse activities (inc. NedBank) and African presence.

Overall, though, I was looking to avoid this route and take on a specialist insurer. Two piqued my interest: Amlin and Catlin. In reality, it was a close run thing between them and, if I had wanted to include two insurers in my portfolio I would have no doubt picked both. So why did I buy Catlin?

Dividend Yield

Firstly, Catlin is an extremely attractive dividend stock. Catlin was founded in 1984, so is relatively young. However, since its IPO in 2004 it has consistently raised its dividends as below: 


This is an impressive annualised 12.3% dividend growth over this period. Certainly, dividend growth has slowed in recent years. But it is the consistency that counts for me.

This feat is especially impressive because 2011 saw a profit loss due to the particularly disaster-hit year (i.e. Fukushima incident in Japan) hitting profits big time. Despite this, they still managed to raise their dividend.

Obviously, this consistency is a big plus. However, the yield itself is equally impressive. At last year's 31p per share the yield on my purchase would be an excellent 5.99%. 

That by itself is great. But analysts expect the growth to continue for this year. They have pencilled in a 33.84p per share dividend for this year and 34.08p for the year after. This would provide a yield of 6.55% and 6.59%. 

The interim dividend already declared at 10.5p bodes well for this, being 0.5 (i.e. 5%) higher than last year. My recent purchase will be eligible for this dividend with the ex-dividend date on 20 August.

Price/Earnings Ratio

When we look at the price to earnings ratio we also see a solid if not perfect position. For this year analysts predict this:

EPSP/E Ratio
Difference (%)45.65

This does represent (except the high prediction) that the EPS will drop this year. However, with even the lowest P/E figure being 11.61 I don't consider it overly priced.

For the year beyond analysts predict this result:

EPSP/E Ratio
Difference (%)34.96

The same applies here. Again they expect a drop of earnings. But still the stock does not look over priced. 

Dividend Cover

With the above EPS predictions the dividend even with the worst case predictions still should be covered 1.3 times by earnings. 

Certainly, I would hope for this to improve and the fact that the management appear happy to continue the dividend increase record suggests they are confident earnings will be boosted over time. 

What is more, if the consensus estimates are correct then we should have a dividend cover of about 1.6 times for both years. This, for me is a secure dividend at least for the near future.

Other Quantitative Considerations

I also like the fact that since 2009 the debt level has dropped by about 1%. Admittedly this change is not hugely significant just as the drop in cash by about 0.69% is not hugely significant. Nonetheless, a shift down is always welcomed.

What is more, the debt to equity ratio is still a stunningly low 0.02. This is low even for the insurance market and extremely encouraging.

Also, the company reported their book value per share as 547p as of 30 June 2014. As such, the company is currently selling below its book value which is also attractive.

Qualitative considerations

I am also impressed by the company itself. It's founder, Stephen Catlin, is still the company CEO. What is more, as their annual report highlights they put great store in attracting and retaining their staff. This is I believe an important awareness for the company and one I wish was mirrored elsewhere more regularly. 

I also find their proactive role is several worthy projects well worth remembering. Their role in the Catlin Arctic Survey and recent involvement in surveying coral reefs is admirable.


Catlin will hopefully provide a worthwhile contribution to help achieve my investment goals for this year. Certainly, the interim dividend will give me a welcome push towards my dividend income total for this year. What is more, its high yield should ensure I hit my target portfolio yield (currently it is running at about 4.5%, well above my target of 3.5%).

Similarly, its low Beta value should help contribute to bringing my portfolio's volatility down somewhat which may well be very valuable in the coming months.

My only main concern is regarding the fact that I am now even more overweight in financial stocks. Currently the breakdown looks like this:

Financials are thus just shy of being a third of my portfolio. I would prefer this not to be the case. Nonetheless, there are still some potentially lucrative investments in the financial industry which are very much out of favour. Over time I would expect this to reduce significantly.

Overall, though, I am very happy with my purchase. I have been watching Catlin for some time and glad it is my newest portfolio addition.

Analyst Predictions

  • Westhouse Securities--Neutral--500
  • Canaccord Genuity--Buy--560
  • Deutsche Bank--Hold--546
  • Berenberg--Hold--527
  • Espirito Santo--Buy--610
  • Numis--Add--585
  • Credit Suisse--Neutral--515

Do you hold a specialist insurer? Which one is it and why did you choose it? Do you avoid life insurers or hold them equally? 

[Image from the Catlin Arctic Survey]

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