Clean Up Like a Robber Baron After Hurricane Sandy

by David Eller

Do you remember the robber barons from high school history? Men like Andrew Carnegie and John Rockefeller, who made their money building America.

Carnegie made his money in steel, John Rockefeller in oil, and Cornelius Vanderbilt in railroads.

J. P. Morgan, on the other hand, was in finance – not an industrialist. But he was at the center of the action by providing the capital to drive the growth. In 1882, Morgan drove the financing for the very first centralized power generating station in the United States for Edison Electric.

This company, which is now Consolidated Edison (NYSE: ED), provided electrical lighting to the streets of New York City for the first time. These robber barons took advantage of competitors’ weaknesses to buy infrastructure companies at low prices – long-term, cash-generating, low-risk companies.

So what does this history lesson have to do with Hurricane Sandy?

Sandy introduced the fear – and weakness – to allow long-term investors to buy these stable cash generators at a discount.

For the last two weeks, we've seen articles trying to handicap which companies would benefit from hurricane Sandy. This may be a way of making money if you’re glued to your screen and don’t mind trading on speculation, but we think there’s a saner approach for investors. Follow the money and look for stocks that offer a superior yield. As my colleague Marc Lichtenfeld pointed out last week, cash is king and these stocks will pay you for waiting out the storm…

Buying on Temporary Weakness

Utilities and insurance companies started trading off as the storm was approaching and as the extent of the damage was realized, the stocks felt another wave of pressure. However, this may be an opportunity to buy rather than a reason to sell, especially if you're an investor rather than a trader.

Why? Yields are up and the viability of the companies isn’t in question. Essentially, you will be paid – through dividends – to ride out the storm.

Fitch's rating service hosted a conference call on November 8 stating that it doesn’t anticipate changing the debt ratings of insurers as a result of Hurricane Sandy. This means that the debt rating agency believes that any impact on profitability will be short-lived and the company is as likely to pay its debt payments as it was before the storm. Will there be fallout from Sandy? Of course, but paying down the claims won’t change the structure of these companies.

Utilities companies are likely to see earnings pressure, as well. At the peak, there were 8.4 million people without power in 21 states, 2.1 million of which were in New York. Consolidated Edison has been particularly hit hard, having customers without power up to two weeks after the storm.

This environment of fear hasn’t been helped by politicians who are appearing on television chastising the power companies. This bad press continues to chip away at the stock price, but the fact remains that these are regulated monopolies. They have to apply for a rate increase, and New York isn’t using less power. Usually when you see pricing and volume go up, profits will, as well.

By focusing on companies offering a good yield, investors are paid for waiting while the business recovers to pre-crisis levels. As the business recovers, profits improve and share prices are likely to follow.

Which Companies Look Best, Worst?

The robber barons built their fortunes by investing in infrastructure companies like Consolidated Edison. We may have missed the early trade (about 100 years ago), but we can take advantage of temporary weakness to buy in now.

The insurers and power companies listed below have exposure to the storm-covered regions:

Company Ticker

Price

%off of recent high

Dividend Yield

Insurance
Allstate ALL

38.55

9.9%

2.3%

Chubb CB

74.17

9.3%

2.2%

Tower Group TWGP

17.56

13.9%

4.3%

Utilities
Northeast Utilities NU

37.96

5.8%

3.6%

Consolidated Edison ED

55.12

8.9%

4.4%

 

Each has come under pressure recently and is offering a better yield than the 10-year Treasury. Consolidated Edison has been accused of aggressive accounting practices, including low pension reserves, and with the yield difference at less than 1%. For that reason, we would favor Northeast Utilities (NYSE: NU) over Consolidated Edison for more risk-averse investors. If Consolidated Edison approaches a $50 share price, which would bring the yield closer to 5%, we would be more tolerant of the extra risk.

The insurance companies are another story, however, since they share their risk with reinsurance companies. Tower Group (Nasdaq: TWGP) recently announced quarterly results and missed EPS expectations by $0.01 in a quarter that showed no impact from Sandy. This raises a red flag since the coming quarter will be the test of a company’s ability to manage operations in a difficult environment.

Instead, I’d look harder at companies like Allstate (NYSE: ALL) and Chubb (NYSE: CB). Allstate for its breadth of product and Chubb for its reputation as the premier home insurer.

As always, it pays to go against the crowd.

Good Investing,

David

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Get Chubby and Pocket Fat Profits

One of the companies David mentioned today is Chubb Corporation (NYSE: CB). And of all the companies he mentioned, this is the one you’ll want to pay the closest attention to.

Chubb is a long-time member of The Oxford Club’s Perpetual Income Portfolio. And since 2010, it’s gained over 54% including dividends. But since October 18, the stock has lost more than 9% - which as David points out today, is an excellent buying opportunity for long-term investors.

As our dividend specialist Marc Lichtenfeld has pointed out various times, when safer dividend stocks fall in value, it’s actually not that bad. That’s because a lower stock price adds to the yield. And if you’re reinvesting the dividends, as Marc recommends in his book Get Rich with Dividends, it means you’re able to buy more shares with your reinvested dividends, which creates even more dividends to reinvest.

And while Chubb doesn’t have an extremely high yield, it does have an excellent history of raising its dividend – which plays perfectly into Marc’s reinvestment strategy. And with a payout ratio below 25%, the dividend should be safe for longer than most of us will be alive.

Here’s a bit from Marc about Chubb and why he’s a fan of the stock, even before it recently went on sale:

“Chubb was founded 130 years ago. It’s the 11th-largest property and casualty insurer. It has over 10,000 employees in 27 countries.

“Chubb usually isn’t the cheapest insurer. Its business model is to charge high prices and provide outstanding service, including paying claims quickly. It will not lower its prices simply to gain market share. It sticks with its pricing to ensure that it’s being compensated for taking on risk. It would rather lose the business than take on excess risk.

“Chubb’s yield isn’t huge, currently just 2.2%... But the company has a long history of dividend boosts. The last time Chubb didn’t raise their dividend, The Righteous Brothers’ ‘You’ve Lost That Lovin’ Feeling’ was the top song in the country. That was 46 years ago…

“Chubb is an extremely well-managed company. As a result, its financial results are outstanding. Since 2004, the company has grown its book value by over 10% annually. Chubb’s profit margin of 13.5% blows away the industry average of 5.2%. It’s also half as volatile as the S&P 500. In fact, during the financial crisis when the S&P plummeted 37%, Chubb only dipped 4%.

“Debt is equal to only 25% of its stockholders’ equity and 8% of its assets.

“Management’s superior handling of the company’s business has rewarded shareholders handsomely, as the stock has outperformed both the S&P 500 and the property and casualty sector over one-, three-, five-, 10- and 15-year periods.

“Chubb’s business, to be polite, is boring. A conversation about it brings on yawns and droopy eyelids. But the company’s steady gains, growing dividend and excellent management team no doubt helps investors sleep better at night.”

So for those investing for the long haul, this may be your shot to buy low on a fantastic company that should continue to grow for decades.

– Justin Dove with Marc Lichtenfeld

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