As part of its concerted efforts to enhance value for its shareholders, the board of directors of Assurant Inc. (AIZ - Analyst Report) authorized a 17% increase in its quarterly common stock dividend last Friday. Assurant will now pay a quarterly dividend of 21 cents per share, up from 18 cents paid in the last quarter. The increased dividend will be paid on June 12, 2012 to shareholders of record as of May 29, 2012.
The dividend hike is primarily supported by Assurant’s strong balance sheet (low debt ratio of 18.2% and no debt maturing till 2014) and its ability to generate healthy cash flow. Assurant has a moderate annualized dividend yield of 1.9% compared with its close peers Loews Corp. (L - Analyst Report) and The Travelers Companies, Inc. (TRV - Analyst Report), which generated dividend yields of 0.6% and 2.9% respectively.
Assurant has had a consistent track record of increasing quarterly dividends. The current authorization represents the ninth dividend increase since 2004.
Share price of Assurant inched up 0.6% to close at $37.81 as on Friday. It is likely possible that the spurt in share price was backed by a higher magnitude of dividend increase. The board last authorized a 12.5% increase in dividend.
Assurant commenced paying dividends in 2004 (the year it went public) and paid a total of 21 cents per share in its first year. In 2011, the company paid 70 cents in dividends, which represents annual average growth of 19.5%. The company’s dividend growth rate has, however, declined to 11.1% in 2011 from 48% in 2004.
Despite moderate dividend growth, we believe that the company will be able to continue increasing dividend payments aided by its low payout ratio. Assurant has been very careful about its payout ratio and has gradually increased it over the years.
In 2004, the company’s dividend payout ratio was 5.7% and over the years increased gradually to reach 15.4% in 2011. A considerably low payout ratio compared with the industry average helps it to keep dividend payment fluctuations at bay.
The soft insurance market environment since 2005 provided Assurant little scope to grow organically. The company managed to keep its shareholders happy by actively managing its capital via dividend payment and share buybacks. Share buyback along with dividend payments constituted a total payout ratio of 135% in 2011, which implies that the company distributed 135% of its net income for paying dividends and buying back shares.
Assurant’s different business units are challenged by macroeconomic weakness. While its Employment Benefits business is suffering from a weak payroll, its health business outlook remains uncertain given the impending Health Care Reform decision.
Though its Specialty property business is performing well, earnings from this segment are expected to decline given increased regulatory scrutiny over the rate reduction of forced place insurance. The company’s Solutions business is also suffering from weakness in the U.K while the domestic results continue to be favorable.
Overall we expect top-line growth at Assurant to remain weak, at least through the first half of 2013. In such a scenario, the company’s attractive dividend policy will play an important role in maintaining investor confidence.
Assurant currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term Neutral recommendation on the shares.