Admittedly, riding Warren Buffett’s stock-picking coattails is a pretty sound strategy. While Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) doesn’t outperform the S&P 500 every single year, under his direction, the fund consistently outperforms investors’ favorite benchmark more often than not, and by quite a bit. You’d do well to borrow some of Buffett’s ideas.
The thing is, you don’t have to limit yourself to just holdings found in Berkshire Hathaway’s portfolio. There are plenty of low-cost, reliable, dividend-paying names the Oracle of Omaha would arguably like to own, but simply can’t due to logistical and regulatory reasons; smaller companies, in particular, are tough for Buffett to step into.
One such name worth your consideration is the insurance outfit Everest Re Group (NYSE:RE).
A small company with big-company results
You’ve probably never heard of it. But, that’s kind of the point. With a market capitalization of $11.3 billion, Everest Re Group mostly remains off of Wall Street’s radars. But don’t let the smaller size fool you. This company performs just as well as its much bigger rivals.
Everest Re Group offers a variety of property and casualty insurance products, but to those who know it best, it’s predominantly a reinsurance name. That just means it serves as an insurance agent of sorts to other insurance companies you may be more familiar with, although it might be more accurate to say the company helps insurers reduce their net risk by collectively pooling their risks with other insurers. It’s a business Buffett is very familiar with. In addition to Berkshire’s wholly owned insurance brands like GEICO and National Indemnity Co., the company also owns property and health reinsurance outfit General Re.
There’s a reason Buffett has an affinity for the business — it’s cash flow intensive. And, while unpredictable events like pandemics, hurricanes, and wildfires can take an unexpected toll on profitability from one year to the next, those financial dents actually aren’t all that difficult to offset with future earnings. That’s because actuaries (the number-crunchers that determine premiums) employed by insurance companies recalculate insurance rates every year based on previous years’ costs.
Sure, it’s conceivable insurance customers may shop around for lower premiums than the ones being offered by their present insurer. But all actuaries from all insurers are working with the same data and same claim trends. Also don’t forget that Everest Re Group is a reinsurer, meaning it largely aggregates the industry’s overall risks and rewards. Because many individuals and most businesses have no real choice but to purchase insurance protection from someone, Everest Re Group’s annual top-line and longer-term bottom-line growth are actually pretty reliable. The graphic below puts things in perspective.
That’s not the only reason Buffett would be a big fan of Everest Re Group, however, if it were big enough for Berkshire to buy. It’s not even the biggest reason Buffett might be interested. The far more compelling aspect of Everest to value-oriented investors right now is, newcomers are plugging into the stock at a great price and a great yield thanks to a dividend payment the company can easily afford.
Here are the numbers: Shares of Everest Re Group are priced at only 8.5 times their trailing-12-month earnings, and 9.1 times next year’s projected per-share profits. The dividend yield of 2.16% is healthy even if it’s not thrilling. But it’s a dividend that’s not failed to be paid in any quarter since the mid-90s, and a dividend that’s more than tripled in size since 2013.
More than anything, though, it’s a dividend that’s easily covered by bigger-picture earnings even after factoring in occasionally catastrophic payouts. Everest Re Group’s current annual dividend of $6.20 per share, for instance, is only around half of 2020’s earnings of $12.78 and one-fourth of 2019’s profit of $24.70 per share.
If you do decide to tread where Warren Buffett can’t and take a shot on Everest Re Group, be sure to brace for above-average volatility. Investors tend to be overly responsive to the occasionally big losses all insurance companies must suffer every now and then.
Don’t sweat it when — not if — it happens. Those same investors also tend to forgive and forget pretty quickly once they realize the insurance and reinsurance industries are actually quite resilient, adjusting rates every year as needed. Indeed, one of these pullbacks would make for a great entry opportunity as long as you can make a long-term commitment to that admittedly unexciting name.
This might help in that regard: Everest Re Group shares are up 38% for the past three years, and higher to the tune of 229% for the past decade. The stock’s gained more than 1,000% for the past 25 years. That’s about twice is strong as the S&P 500’s performance for the same 25-year stretch.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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