Investors love acquisitions, and for good reason.
If you own the acquired company, your holdings typically see large returns. If you own the acquirer, potential synergies promise ever-higher earnings-per-share in future years.
ACE Limited (ACE) recently announced it will acquire Chubb Group (CB) for $28.3 billion. Chubb stock jumped from around $95 a share to around $121; a gain of around 27%.
I told my readers to sell Chubb now and reinvest the proceeds into other high quality dividend growth stocks. The rationale for that decision is explored in detail below.
Chubb Overview
In 1882 a father-and-son team founded Chubb. Since that time, the company has grown to become a large multinational property and casualty insurer with 10,200 employees and $2 billion in annual income.
The company has grown over the last 133 years by being a conservative insurer that never risks ‘blowing’ up by writing unprofitable policies. Chubb’s slogan is “never compromise integrityâ€.
The combined ratio in insurance is the sum of expenses and claims paid divided by premiums received. A combined ratio under 100% shows that an insurer is writing profitable policies before accounting for investment gains from invested float.
Chubb has maintained a combined ratio under 100% every year since 2002. All investment income has gone straight to the bottom line for Chubb over the last 13 years.
Chubb is able to maintain a combined ratio below 100% by focusing on niche property and casualty insurance markets. The company looks for profitable policies rather than growth-at-any-cost.
Before the ACE acquisition, Chubb was actively buying itself through share repurchase. The company has repurchased about 6% of shares outstanding in the last 12 months. This combined with the company’s dividend yield of ~2% gave investors a shareholder yield of 8%.
Chubb was able to return virtually all of its earnings to shareholders due to its conservative policies. The company operates a low-risk business that produces substantial free cash flows.
