Old Republic International: A Stock Every Income-Focused Investor Should Own

seekingalpha02-09

Old Republic International is a reliable dividend-paying stock with a long track record of dividend increases.The company reported steady earnings and net income growth, although there was a slight ...

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If rates remain higher for longer, this could continue as a headwind going forward, impacting earnings in the process.William_Potter Introduction If you're an investor focused on income and not familiar with Old Republic International (NYSE:ORI), then shame on you. I'm kidding, but the insurance giant is one you should consider holding in your portfolio. The stock has a very long track record of paying dividends and they don't look to be slowing down anytime soon. One thing I enjoy about the company is their fiscal conservatism and occasional special dividends. They recently reported full-year earnings and the company did what they always do, deliver solid results. In this article I discuss why Old Republic is a company worth owning in an income-focused portfolio. Earlier Analysis I last covered Old Republic International back in September in an article titled: No Flash Just Cash. The title is pretty self-explanatory. ORI is a stock that often flies under the radar but has been paying steady dividends for nearly a century. I also discussed in the article how the insurance industry has outperformed the broader market over a 1, 3, and 5-year period. The company also experienced some insider buying during that period as well. This could be the reason the price appreciated from $27 to above $30 before retracting to $27.76 where it currently trades. Data by YCharts Earnings Since My Last Article Since September, ORI reported Q3 and Q4 earnings. During the second quarter the company reported EPS of $0.62. Since then, EPS rose to $0.72 before declining in Q4 slightly to $0.69. Despite the somewhat volatile earnings over 3 quarters, net income has continued to rise steadily quarter-over-quarter from $139.4 million to $155 million, primarily driven by higher yields. Author creation EPS also dropped from $0.80 at the end of 2022, which probably also played a part in the share price decline last month. Net premiums also saw a slight drop quarter-over-quarter from $1.76 billion to $1.74 billion. These were weaker than expected, driven by a 5% decrease in the Title Insurance segment. But this was up from $1.65 billion in Q2. Full-year EPS of $2.63 declined by nearly 6% year-over-year but comfortably out-earned the annual dividend payout of $0.98 a share. ORI has raised their dividend for 42 years and seeing the company's conservatism, I expect them to make it to Dividend King status in the foreseeable future. Additionally, I expect a dividend increase between $0.01 to $0.02 this upcoming March. Analysts' estimate an annual payout of $1.04 speculating a $0.015 increase to the quarterly dividend. Shareholder Friendly Another thing that makes ORI worth holding is the shareholder-friendly nature of the insurance giant. The company occasionally pays a special dividend to its shareholders, usually at the end of the year. I, and I'm sure many other shareholders as well would have loved to receive a special dividend at the end of the last year. But, that didn't happen. In the prior four years they paid specials of $1.00 a share with the exception of 2021 where the company paid a larger special of $1.50. So, if the 42 years of dividend increases don't entice you to buy the stock, maybe the occasional specials will. ORI investor presentation Old Republic also likes to retain cash for frequent buybacks of its shares. In Q4 they completed their authorization to repurchase up to $450 million worth of shares. Year-to-date they repurchased $530 million worth of shares taking a total of 20.9 million shares outstanding off the market. This, along with reinvesting back into the business will likely increase earnings over time, allowing the company to increase their regular dividend and pay specials from time to time. Strong Returns vs The S&P For a boring insurance stock that not many seem to talk about, the company has been handily outperforming the S&P over a longer period of time. Although they fell behind the index over the past year, looking out over a 5-year period you can see they've bested the market in total returns. Seeking Alpha And looking over a decade the gap widens even further, outperforming the S&P by roughly 75%. So, long-term investors in the stock have done pretty well when it comes to total returns. ORI is a true steady eddy stock that just continues to perform. Reminds me of the race between the Tortoise & the Hare. Seeking Alpha ORI has even outperformed some of its larger peers in the sector as well. Over the past 3 years they've outperformed peer American Financial Group (AFG). But peer Kinsale Capital Group (KNSL) outperformed both by sizable margins during the time period. Seeking Alpha Looking out over a longer period both peers outperform Old Republic pretty handily with Kinsale Capital besting both by significant margins. Although peers KNSL & AFG outperformed ORI, all three outperformed the S&P's 168% in total returns. Moral of the story is every income investor should own boring insurance companies in their portfolio. Seeking Alpha Fairly Valued At its current price of less than $28, I think the stock could be a buy for long-term investors. I started buying the stock at $24 and preferably like to buy them at $26 or less. I've added to my position here and there but stop adding when the stock got ahead of itself reaching above $30 briefly. Furthermore, the stock trades at 1.2x their book value of $23.31. This increased from $21.37 in Q3 and 15% year-over-year from $21.05. This is in comparison to smaller peer, RLI Corp (RLI) who trades at 4.4x its book value. And First American Financial (FAF) who trades at 1.3x. So, again ORI is a hold for me, but could be a buy for some. Wall Street currently rates the stock a hold with a price target of $31 so they do offer some decent upside since the recent price retraction. Their current P/E trades slight above their 5-year average of less than 10x. Using the Discounted Cash Flow Model I have price target of nearly $32 for ORI. moneychimp Now, some may argue that this is too high of a price target for a stock like Old Republic, but seeing how the company continues to grow its book value per share and their price target continues to receive small bumps, I think it's at a decent price. Although the company doesn't have a large following, the business is quality, and quality usually comes at a price. Again, I like the stock preferably around $25-$26 or under, but here is a decent price to nibble. Headwinds This year has been challenging for not only Old Republic, but several other high-quality businesses as well. With interest rates remaining elevated, this has caused many of them who rely on consumer spending to face headwinds. ORI has faced declines in pretax & net income as well as a decrease in net premiums and fees earned. The company's combined ratio was higher at 92.6% vs 91% in 2022, and operating income dropped from $1.59 billion to $938 million. Mortgage insurance rates and a soft real estate market also impacted the company as well. And if rates remain higher for longer as promised, this could continue to be a headwind for the business going forward. I suspect rates will decline sometime this year around May or the second half (of the year). But of course this is all data dependent and anything can happen between now and then. This is something to keep a close eye on as it could affect the share price as well. Investor Takeaway The recent share price decline due to mixed earnings brought ORI's share price back to a more investable level as the company had gotten ahead of itself surging above $30 per share. Although quality usually commands a premium, I like the stock at $25 or below for a nice margin of safety. Despite headwinds, the company has continued to grow its book value per share. Using the Discounted Cash Flow Model, I have a price target of nearly $32, showing there is some upside for investors. Investors with a longer-term outlook for the company may find this level attractive to nibble and buy on any additional share price weakness.  If you're an income-focused investor wanting steady dividends from a high-quality business, then you should consider holding Old Republic in your portfolio. Despite somewhat inconsistent earnings, the stock is still a solid buy at the right level. I suspect next quarter earnings may also see some volatility as interest rates remain elevated for the foreseeable future. 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