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Recently, American Financial Group, Inc. (AFG - Analyst Report) declared a special dividend of 25 cents per share payable on December 24, 2012 to shareholders of record as of December 17, 2012. This implies a dividend yield of 0.63%, based on the closing price of $39.97 as of December 6, 2012.

This one-time cash dividend will lead to an expenditure of $23 million for American Financial. However, the company generated operating cash flows of $487 million in the first nine months of 2012, which is more than adequate to cover the expenditure for the special dividend. Moreover, the company’s cash and cash equivalents surged 22.8% year over year to $1.63 billion as of September 30, 2012.

American Financial’s sturdy financials and future prospects enable it to return capital to shareholders via dividends and share repurchases, thereby boosting shareholders’ confidence in the stock. Moreover, efficient capital management helps the company sustain its risk-adverse capital structure, while maintaining adequate capital flexibility required for growth.

American Financial consistently returns value to shareholders. Apart from paying dividends regularly, the company has a track record of raising its dividend each year.

In October this year, the company announced an 11.4% hike in its regular quarterly dividend to 19.5 cents from 17.5 cents paid earlier. The increased dividend was paid on October 25 to shareholders of record as of October 15. Even in October 2011, the company approved an 8% dividend hike to 17.5 cents from 16.25 cents.

American Financial currently carries a Zacks #3 Rank (Hold). We maintain a long-term ‘Neutral’ recommendation on the stock. The company’s peer in the property and casualty business – Cincinnati Financial Corp. (CINF - Analyst Report) – carries a Zacks #2 Rank (Buy).

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