Recent Buy

I believe in being candid and speaking frank. One of my goals when I first decided to blog about dividend growth investing and frugal living was that I wanted this to be a window into my life. Instead of just crunching numbers and posting charts I wanted to show any followers of this blog exactly what I’m doing with finances and how I’m going about executing my plan. This blog is going to be very personal, and I hope any readers enjoy it.

In the interest of being candid I will post every time I execute a trade, whether it be a buy or sell. My most recent trade was just before this blog was started, but I wanted to share.

I purchased 39 shares of HGIC on 2/24/2011 at $35.73 a share. Fair values for this stock ranged from $38.00 to $41.00 a share. I felt that the lower end of that spectrum was fair and I feel that anything below $36.00 per share represents a great deal on this company.

A little about the company, per Morningstar:

Harleysville Group provides insurance services. The company underwrites property and casualty insurance policies, primarily in the Eastern and Midwestern regions of the U.S. It offers commercial automobile, workers’ compensation, and multiperil insurance, as well as personal automobile and homeowner’s insurance. The company markets its policies through almost 2,000 insurance agencies, and maintains offices in about a dozen states.

I’ll be honest. The track record over the past few years is not overly fantastic. EPS has been a little erratic.

Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2010 0.29 0.61 0.76 0.76 2.42
2009 0.61 0.72 0.89 0.86 3.07
2008 0.79 0.31 0.15 0.16 1.44
2007 0.71 0.82 0.83 0.82 3.19
2006 0.67 1.43 0.69 0.71 3.49
2005 0.39 0.48 0.54 0.60 2.01

Revenue is also a little erratic, but growing.

Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 239.0 243.5 249.8 254.0 986.3
2009 246.9 244.5 244.3 245.0 980.6
2008 261.9 261.5 232.5 229.4 985.3
2007 236.9 242.3 242.1 240.7 962.0
2006 239.5 276.5 241.1 242.0 999.2
2005 232.7 236.7 239.2 239.7 948.3

However, entry yield is pretty solid at just over 4% at time of purchase. The dividend growth is also a nice story, with 24 years of dividend growth. The most recent increase was 10.77% going from an old dividend rate of 32.5 cents per share to a new dividend rate of 36 cents per share, paid quarterly. Insurance is a business I understand, and a business that Warren Buffet enjoys as well. Insurance is something people will always need and it’s pretty easy to understand how a spread works. They receive the premium in advance and invest that money to receive a rate of return from which they reinvest or pay out claims. It’s a great business model, and one that will be in existence 10 years from now and 100 years from now. One thing that I don’t particularly like about HGIC is the small, regional footprint of the business as they operate primarily in the Northeast and Midwest areas of the United States.

In terms of insurance companies I am bullish on Aflac and Chubb, and really would love to own both. I feel that the entry yield on those companies is a little low and the price perhaps a bit high right now. I prefer entry yield being above 3%, but will accept a slightly lower entry yield if growth is high enough. Anything below 2.5% is pretty much out for me. Cincinnati Financial is another I’ve looked at, but growth has been very slow over the past 5 years, and they also have a small geographical footprint.

Overall, I am happy with my investment in HGIC. I have wanted to invest in a small-cap company for some time now to try and diversify away from the mostly large-cap bluechips I invest in on a regular basis. There is a lot of growth potential with HGIC, and the entry yield is rock solid.

Thanks for reading.

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