1 Financial Stock for the Next 20 Years
After the recent financial meltdown it may seem hard to think about owning a financial company for 20 minutes, let alone the next two decades. But I think I may have found just the financial stock that's not only worth buying, but worth owning over the long term.
I'll readily admit that this isn't an exciting stock. While you'll more than likely recognize the name, it's probably not a company you've seriously considered investing in. That said, this stock -- and the company behind it -- has a little something to offer almost every type of investor, including great management, a solid business, a nice dividend, a strong brand, and an attractive valuation.
So what is this mystery stock? It's Travelers Companies (NYS: TRV) , the red-umbrellaed U.S. insurance giant whose roots stretch back more than 150 years.
Real risk management
It's easily excusable if you thought that insurers were all supposed to be great risk managers. After all, helping customers manage risk is really their bread and butter.
But as it turns out, many fell far short of that label during the financial crisis. With a hat-tip to Warren Buffett -- whose insurance conglomerate Berkshire Hathaway is no slouch when it comes to risk management -- when the tide went out, investors found out that a whole bunch of insurers had been swimming naked. None more so than bailout poster child AIG (NYS: AIG) , which absorbed a seemingly endless stream of aid to keep from collapsing after its investments led to a near $100 billion loss in 2008.
In that light, we could probably consider Travelers the anti-AIG -- or, if we're talking Seinfeld, perhaps it's the Bizarro World AIG. Either way, though Travelers did see some of its investments fall in 2008, it still reported a $2.9 billion profit. It followed in 2009 with a $3.6 billion bottom line. The company's return on equity was 11.2% and 13.7%, respectively, for those years -- a good result for many companies in any year, let alone one in which the world seemed to be coming to an end.
Here's the "why"
It wasn't by accident that Travelers breezed its way through the financial crisis; rather, it's thanks to solid management by CEO Jay Fishman.
Students of Citigroup (NYS: C) history may recall Fishman as a Sandy Weill protege and a former co-COO of the bank along with Chuck Prince. Fishman actually shied away from moving into the top spot at Citi because he didn't feel that he'd make an effective boss there. Instead, he moved to head what was then St. Paul Companies, while Chuck Prince was left to dance with Citi all the way into infamy.
Though Fishman notoriously avoids the spotlight, Forbes managed to sit him down for an interview a year ago, and the quotes from Fishman are straight out of the Foolish playbook.
On playing the quarterly Wall Street earnings game, Fishman reiterated his focus on long-term returns:
We never think about investing in something just to earn another 10 cents a share... We tell investors, "If you are going to buy a stock just because you think the earnings next year are going to be higher, we are not your company."
Meanwhile, musing on the roots of the financial crisis, Fishman differentiated the way he guided his employees:
Once you tell your people that you don't care if they grow or make more money this year over last, but that they manage the capital they are given in ways that produce superior results over time -- you remove from the organization the impetus to do dumb things. ... People ask me what went wrong with these other companies ... my experience is that if you tell employees what you want them to do, they will try their hardest to do what you ask them.
Fishman's approach may mean that there's never the flashiness at Travelers that would make it a stock that you can brag about at a cocktail party. But for investors who are on the same page as Fishman and want to earn solid returns over time, the results certainly seem compelling. Between 2002 -- Fishman's first full year at the helm of St. Paul -- and the end of last year, the company's book value per share has grown at an average annual rate of 11.6%. And that's even as the company has repurchased more than $17 billion of its own shares and handed investors nearly $6 billion in dividends.
Ripe for the picking
Like many other stocks, Travelers has gone up substantially since the downturn, providing investors with a total return of more than 40% since the beginning of 2009. Even so, the stock has lagged the total return of the S&P 500.
There's still good reason for investors to be eyeing the stock today. Currently, the stock changes hands at slightly below its book value per share. That's well down from pre-crisis, when the stock's multiple was 50% higher.
That's somewhat reasonable, as the fixed-income investments that Travelers relies on don't yield nearly what they did prior to the recession. However, the stock's current valuation is well below that of Progressive -- which trades at more than twice book value -- trails Chubb's (NYS: CB) 1.2 multiple, and is more on par with Allstate (NYS: ALL) .
Given the quality and consistency of Travelers, I think it should trade much closer to Chubb's. Allstate may have had returns that outpaced Travelers prior to the recession, but it was a disaster as the financial sector unraveled, and its average five-year return on equity has been a meager 5.3% versus Travelers' 12.1%.
And as a parting thought, I can't help but give a nod to dividends since they've been so popular among investors lately. Travelers' stock currently yields 2.8%, which is none too shabby on its own and easily tops the current 10-year Treasury yield. Even better, over the past five years, Travelers has grown its dividend at an average annual rate of 9.5%.
Maybe Travelers doesn't strike your fancy. The good news is that if you're among the many investors who have realized the power of dividends, The Motley Fool has put together a great special report, "Secure Your Future With 11 Rock-Solid Dividend Stocks," that you can download for free by clicking here.
At the time this article was published The Motley Fool owns shares of Citigroup and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.
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