This Company Just Raised its Dividend 11%: Is this Stock a Buy?

Dividend raises are pretty much always a good thing, but when a stock boosts its quarterly payout by 10% or more, that warrants particular consideration. However, it also leads to questions like these. Can the company afford the increase? Was it too low before and is the company playing catch-up now? Is the increased dividend sustainable?

These are some questions to examine for insurer Hartford Financial Services (NYSE:HIG), which raised its dividend by 11% in the fourth quarter to 47 cents per share. Should dividend investors give it a look?

Eleven years and counting

As noted, Hartford gave its dividend a nice bump in the quarter, from 42 cents to 47 cents. Additionally, this payout comes at a solid 2.7% yield, which is above the average for the S&P 500 and largely on par with the company’s main industry competitors.

The increase was buoyed by Hartford’s robust third-quarter earnings, as its net income rose some 93% year over year to $645 million, or $2.09 per diluted share. The firm’s strong results were due mainly to higher property and casualty (P&C) underwriting gains, an increase in net investment income from higher yields on fixed income investments, and lower net realized losses. Written premiums were up 8% year over year for the P&C lines — both commercial and personal — and 8% for Group Benefits.

The overall return on equity (ROE), a measure of efficiency, was 14.9% in the quarter, up from 14.3% in Q3 2022.

A more specific profitability measure for insurance companies is the combined ratio, which gauges losses and expenses versus earned premiums. Hartford’s combined ratio also improved. In the commercial P&C lines, the combined ratio dropped to 90.2% from 94.3% in the third quarter a year ago.

Anything under 100 means the company is taking in more than it is paying out, so the lower the better. Commercial lines, with $519 million in net income, accounted for some 80% of Hartford’s overall net income, so this is by far the biggest revenue generator.

The combined ratio for the much smaller personal P&C lines was 107.9% but down from 109.6% a year ago. This business had a net loss in the quarter. However, the profitability gauge for Group Benefits, the loss ratio, was also lower at 70.2%, down from 72.8%.  

Higher earned premiums and lower combined ratios are two things dividend investors want to see, as they indicate underwriting success and efficiency that enables the firm to invest in its shareholders through its dividend. Hartford has been very consistent on this front, as it has managed to increase its dividend now for 11 straight years, but is that sustainable?

Is an 11% dividend raise a stretch?

The fact that Hartford has a long track record of supporting its dividend is part of it, but the other thing to look at is its payout ratio. The payout ratio is the percentage of earnings that goes to the dividend, and if it is too high, say, over 50% or 60% (depending on the company), it indicates that maybe the company is reaching a bit to boost its dividend.

However, in the case of Hartford, the payout ratio is just 20.8%, which in fact is on the low side. The firm could easily continue to fund dividend increases based on that payout ratio, as the sweet spot is typically in the 30% to 50% range.

There is also reason to believe that Hartford can continue to generate solid earnings. The current high-yield fixed-income environment should lead to high investment income, and the firm anticipates that its core earnings ROE will remain in the 14% to 15% range.

Hartford’s stock is down 5% year to date, but the consensus price target is $85 per share, which is some 18% higher than the current share price. With its price-to-earnings ratio down to 9.69 from 12.42 on June 30, now might be a good time to give this dividend stock a look.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.