Stock Analysis: Harleysville Group Inc. (HGIC)

This article originally appeared on The DIV-Net December 28, 2009.

Linked here is a detailed quantitative analysis of Harleysville Group Inc. (HGIC). Below are some highlights from the above linked analysis:

Company Description: Harleysville Group Inc. is a regional holding company for property and casualty insurance companies that operates in 32 states, primarily in the eastern half of the U.S.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
   
2. 20-Year DCF Price
   
3. Avg. P/E Price
   
4. Graham Number
   

HGIC is trading at a discount to 1.), 3.) and 4.) above. The stock is trading at a 7.5% discount to its calculated fair value of $34.88. HGIC earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
   
2. Debt To Total Capital
   
3. Key Metrics
   
4. Dividend Growth Rate
   
5. Years of Div. Growth
   
6. Rolling 4-yr Div. > 15%
   

HGIC earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. HGIC earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 22 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
   
2. Years to > MMA

HGIC earned a Star in this section for its NPV MMA Diff. of the $2,081. This amount is in excess of the $1,300 target I look for in a stock that has increased dividends as long as HGIC has. The stock's current yield of 3.87% exceeds the 3.72% estimated 20-year average MMA rate.

Other: HGIC is a member of the Broad Dividend Achievers™ Index.

Conclusion: HGIC earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks HGIC as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $38.49 before HGIC's NPV MMA Differential decreased to the $1,300 minimum that I look for in a stock with 22 years of consecutive dividend increases. At that price the stock would yield 3.25%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,300 NPV MMA Differential, the calculated rate is 6.7%. This dividend growth rate is less than the 8.4% used in this analysis, thus providing a margin of safety. HGIC has a risk rating of 1.25 which classifies it as a low risk stock.

HGIC underwrites property and casualty insurance policies and 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. On October 27, 2009, HGIC agreed to assume Delta's book of Delta Lloyds Flood Insurance Business effective November 1, 2009. This is a company that I have watched for some time. It has very little debt and its free cash flow payout is relatively low. HGIC is attractively trading below my buy price of $34.88. It is a stock I will give strong consideration to in the future as my asset allocation allows. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in HGIC (0.0% of my Income Portfolio). What are your thoughts on HGIC?

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