NEW YORK (TheStreet) -- Insurers Chubb (CB) and Aflac (AFL) are rare stocks in today's market: high-quality businesses that trade at relatively cheap prices. But which will reward shareholders the most in the coming years?
Based on my criteria for dividend investing, Chubb is better for risk-averse investors, while Aflac is better for those who can withstand large price swings. Both make excellent investments for long-term shareholders interested in income and growth.
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Chubb operates in three divisions: personal insurance (37% of revenue), commercial insurance (43% of revenue), and specialty insurance (20% of revenue). Chubb's conservative management is recognized as among the best in the industry.
The company has maintained a combined ratio of less than 100% since 2002. The combined ratio is expenses and claims paid divided by premiums received; it measures the profitability of an insurance company's operations before investment income. Chubb has been highly profitable for more than a decade, which is rare in the fiercely competitive insurance industry.
Chubb is undervalued relative to its peers in the large-cap property and casualty insurance industry. Its peer group has an average price-to-earnings ratio of 13.53, while Chubb has a P/E ratio of less than 11.3, which implies 20% upside at current levels. The overall insurance industry is trading at a significant discount to the market as a whole. The S&P 500 has a P/E ratio of about 19.
Aflac is more than an obnoxious white duck. The company is the leading cancer insurer in Japan, where it generates about 73% of its revenue. Aflac gets the remaining 27% of its revenue from the U.S. It's heavily exposed to fluctuations in the yen-to-dollar exchange rate, which has negatively affected the company's U.S.-denominated earnings and pressured it stock lower.
Aflac is significantly undervalued compared to other accident and health insurers. The average P/E ratio for medium- and large-cap health insurers is 12.2. Aflac has a P/E ratio of less than 10. The company is trading at a 25% discount to other accident and health insurers. Aflac will likely see its P/E rise when the yen begins to appreciate vs. the dollar. In the meantime, shareholders get paid an annual dividend yield of 2.4% to wait.
Both Chubb and Aflac have a long history of annual dividend increases. In fact, both have raised their dividends for 32 years in a row. Shareholders have come to expect yearly dividend increases from both companies due to their consistent growth.
Chubb has a dividend yield of 2.2%, while Aflac has a dividend yield of 2.4%. Not only do Aflac and Chubb have similar yields and dividend histories, they also have similar payout ratios. Aflac has a payout ratio of 23%, vs. 22% for Chubb. Both companies' conservative payout ratios give them significant room to increase dividends faster than overall company growth in the future.
Aflac stands out from Chubb because of its higher growth rate. The company has grown revenue per share more than 8% a year over the last decade, vs. about 6.5% a year for Chubb. Aflac's higher growth rate comes with significantly more risk, however, because its exposure to the yen makes its stock highly volatile. Aflac's stock price has a 10-year standard deviation of 44%, vs. only 27% for Chubb.
And the Winner Is...
Chubb outranks Aflac using my eight rules of dividend investing due to its significantly lower standard deviation. Aflac's slightly higher growth rate does not fully compensate investors for the added risk the company has from exposure to the Japanese currency. Both businesses are significantly undervalued, although Aflac appears to be a slightly better bargain with its 26% potential upside vs. 20% for Chubb. Both businesses have a long history of profitable growth and will likely continue rewarding shareholders with rising dividends in the future.
Read More: Aflac: Best-in-Breed, Limited Downside Risk
At the time of publication, the author had no positions in any of the stocks mentioned, although positions can change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates CHUBB CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate CHUBB CORP (CB) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, good cash flow from operations, notable return on equity and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: CB Ratings Report
TheStreet Ratings team rates AFLAC INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate AFLAC INC (AFL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, increase in stock price during the past year, attractive valuation levels and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: AFL Ratings Report