With the Euro Dividend All-Stars list‘s coming of age it became clear rather quickly that one dividend growth stock isn’t like the others. There are companies that offer an attractive dividend growth rate to investors for a couple of years already, but then there are also the dividend mammoths. They boast decades of sustained dividend payments and increased returns to investors. Munich RE is one of those companies.
The Münchener Rückversicherungs-Gesellschaft (ETR:MUV2), or Munich RE as it’s more commonly known, is a Germany-based reinsurance company. It was founded in 1880 by Carl von Thieme, the same person behind other major German insurer Allianz (ETR:ALV). Over time, Munich has managed to become a worldwide reinsurance leader through its excellent risk and portfolio management, to which its sustained dividend payment for the past 45 years is testament.
Let that sink in for a minute. This company has managed to return a sustained and often growing dividend to investors for almost half a century.
What’s not to love about that? As a dividend growth investor these are the type of smashing statistics I love to see. Long-term success and growth makes up the DNA of Munich RE as it is at the core of its quality above quantity mantra. By combining primary insurance and reinsurance under the same roof, Münchener furthermore builds on broad and diversified risk management expertise that many of its competitors lack.
Munich RE’s current business consists of three major segments: reinsurance, primary insurance and health insurance. The reinsurance portfolio under management is by far the largest with a premium income of about €27 billion in financial 2014. Another €18 billion in premiums comes from Munich’s second pillar, the ERGO primary insurance brand. Finally, Munich also launched a €5.3 billion health branch in 2009 to pool its worldwide health insurance knowledge.
Munich’s 2014 annual report shows that its excellent returns come from a well-managed work force that is highly committed to its employer. Because of the employees’ high level of specialisation, Munich is able to rely on world leading disaster prediction. As a result, the company’s income has been growing, even though it is inherently unstable due to the unpredictability of random harm. The 2011 earth quake in Japan, for example, wiped away a large part of that year’s profits.
Long-term growth, however, remains stable. With the continued accumulation of assets worldwide, the need to protect those assets through insurance and reinsurance remains present. Being the market leader, Munich RE is sure to capitalise on this trend. Interestingly, Munich forms a de facto worldwide oligopoly with its direct competitors Swiss RE (VTX:SREN), Berkshire Hathaway (NYSE:BRK.B), Hannover RE (ETR:HNR1) and Lloyds of London.
One major risk to the reinsurer’s short-term profitability comes from the high dependency on the capital market. With a debt-to-equity ratio of 90% Munich’s business model relies heavily on borrowed money. When the European Central Bank decides to end its Quantitative Easing programme and interest rates take a hike in the future, this could put pressure on the company’s profitability in the short-term.
Even though Munich’s income is rather unstable, it aims to return at least 25% of profits to shareholders in the form of a dividend. As previously said, the company has managed to do so since at least 1970 without lowering the payout. The insurer is furthermore committed to not undercut the dividend in future payments.
Current investors receive a €7.75 dividend over financial year 2014, which is rather high in today’s market considering that the stock trades at €199.50. Even with its 20% YTD growth spurt after the ECB announced QE in the Euro area, Munich RE’s P/E ratio isn’t high with a measly 10.9.
If a 3.88% yield isn’t enough to win investors over, it’s the consistency and long-term growth that make Munich RE such an attractive investment. Even though dividend growth has been choppy, which is the result of the inherent unpredictability of its business model as stated earlier, Munich succeeded in growing its dividend 6.15% on average for the past five years. Its 10-year dividend growth rate is even higher with a whopping 14.51% annually.
When considering the fact that its 2014 earnings per share come out at €18.29, the pay-out-ratio remains rather low with just 42%. As such, there’s still room to grow the dividend in the future without undermining the long-term business model. On top of the dividend payment, Munich continues a buy back programme to the tune of €1 billion worth of shares in 2014.
It becomes clear then that there are some tangible risks to an investment in the Münchener Rückversicherungs-Gesellschaft, but that those risks are managed in a professional and expert manner. Even though its underlying business model is unpredictable, Munich RE has earned itself the title of a bond-type investment in many German households because of the stable return to investors over the past five decades.
Another clear indicator of the long-term potential of Germany’s leading reinsurer is the fact that Warren Buffet, the legendary Berkshire Hathaway investor who built his own empire on insurance products, became the single largest shareholder in Munich RE with an 11.2% stake in the company in 2010.
Do you agree with Buffett on the long-term viability of a Munich RE investment? I certainly do.