2021 Week 22: Old Republic International (NYSE: ORI)

Portfolio Update

The FiveTwenty portfolio received no dividends in the past week.

Past Week Dividend$0
Current Quarter Dividend (Q2 2021)$112.67
LifeTime Dividend$225.71
Estimated Annual Dividend$1,694.34
Dividend Scorecard

The capital allocation for the week of 05/30/2021 to 06/05/2021 will be used to establish a position in Old Republic International (NYSE: ORI)

ORI – Company Profile

Old Republic International (ORI) engages in insurance underwriting and related services business in the US and Canada. The company operates through three segments: General Insurance, Title Insurance, and RFIG run-off business. Official Site | Wikipedia

Dividend Streak40 years
Yield3.24%
Payout Ratio34.27%* (GAAP 15.20%)
P/E10.59* (GAAP 4.70)
Entry Criteria Scorecard

* computed using adjusted EPS of $2.48 as of Q1 2021

Financials

Does ORI have the financial means to sustain and raise its dividend going forward?

Over the last decade, ORI’s grew revenue and income considerably. ORI’s revenue and net income numbers reported on a GAAP basis contain investment gains and losses, which starting with FY 2018 include unrealized gains (losses). Therefore, we consider operating revenue as well as net income from operations to be better measurements of the company’s financial condition.

ORI grew operating revenue from $4.6 billion in 2011 to $7.3 billion by 2020. Operating net income grew from $-352 million to $671 million. Starting in 2013 the Consumer Credit Indemnity and Mortgage Guaranty divisions consolidated into the RFGI run-off business stopped producing large underwriting loses and returned to profitability. Furthermore, the share of the run-off operations as a percent of the total business have continued to decline. At the end of 2020, the run-off business represented only $445.8 million of shareholders’ equity (about 7% of total shareholders’ equity).

In the last 10 years, adjusted EPS (operating EPS) have grown along in line with operating net income. A net loss of -$0.86 per share in 2011 turned into a $2.24 per share net income by 2020.

The average dividend per share growth rate was 1.80% per year in the past 10 years and 3.40% per year in the past 3 years. (per GuruFocus) Even though dividend growth has accelerated in recent years, higher overall profitability for ORI meant that the payout ratio as a percentage of operating EPS decreased.

ORI in 2021 and beyond

ORI started FY 2021 with a strong Q1. Operating revenue increased 15.9% to $1.98 billion from $1.71 billion for the same period in 2020. Furthermore, operating net income and operating EPS increased 46.5% and 46.8% respectively from the same period a year ago. Additionally, the RFGI run-off business once again produced a small underwriting profit.

Valuation

Are we paying too much for ORI at the current share price?

In the last 10 years, ORI’s P/E ratio saw a low of 3.7 and a high of 699, with a median value of 12.23. (per GuruFocus) The current TTM P/E ratio (based on GAAP earnings) of 4.70 is close to the bottom of the range. Furthermore, the TTM P/E ration based on adjusted earnings of 10.59 is still below the historical median value.

The current share price of $26.26 is 8.2% above the 50-day moving average and 37.9% above the 200-day moving average. Additionally, the share price is at the top of the 52 week trading range.

The share price had a significant run-up since the beginning of the year. However, compared to historical P/E values ORI still offers quite an attractive entry point.

Yield

How does the current dividend yield for ORI compare to historical values?

In the last 10 years, the dividend yield for ORI has been in a range of 3.23% to 9.57%, with a media of 4.5%. (per GuruFocus) The current TTM yield of 3.24% is at the bottom of that range. The current MRD rate is somewhat higher at 3.35%.

The current yield for ORI is at historic lows. However, so is the current payout ratio. We believe that this will allow ORI to increase its quarterly dividend at a higher rate than it has done in the past or continue to issue special dividends like it has done in recent years.

Thesis

Why are we adding ORI to the FiveTwenty portfolio?

ORI has a long track record of paying an increasing dividend. ORI’s business was especially hard hit by the great recession. Due to considerable underwriting losses in the Mortgage guaranty division, ORI had 5 consecutive years, 2008 to 2012 of net operating losses. However, the company continued to pay and increase its dividend un-interrupted.

With ORI business having returned to solid profitability, we believe that the company will continue to reward its shareholders with an increasing dividend payout.

Additional Research


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