The recent turmoil in technology valuations has caused many investors to speculate on speculative strategies. Nothing goes up forever, perhaps best reflected by the fact that Cathie Wood’s ARK Innovation ETF (ARKK) is down 48% since hitting an all-time high in February of last year.
In the past week alone, the Nasdaq 100 (QQQ) is down 4.5%, outpacing a massive 1.9% decline for the S&P 500 (SPY). As the market shifts away from risky sectors, it pays to own durable value stocks that pay a healthy and growing return.
This brings me to the Old Republic (ORI), a reliable source of income that serves its shareholders well. In this article, I’m highlighting what makes ORI a solid value stock worth buying today, so let’s get started.
ORI is an old reliable buy value, and here’s why
Old Republic is a Chicago-based Fortune 500 company that engages in the insurance underwriting business. Its core segments include general and property insurance. ORI’s general insurance ranks among the 50 largest in the United States, and property insurance operations are the third largest in the country.
Notably, ORI has paid dividends for 80 consecutive years, and has raised dividends for 40 consecutive years. This puts ORI on track to be the only insurance company to achieve Dividend King status within 10 years.
ORI is doing well in the current environment as strong demand for housing and mortgage refinancing has been a boon to the business. This is reflected by an increase in net consolidated premiums and fees by 18.6% YoY during the third quarter and by 21.7% YoY in the first nine months of 2021.
This was driven by respectable growth in single digit premiums in the general insurance sector, and strong growth in the property insurance sector as housing demand approached record levels. I also encourage strong underwriting, with ORI producing a combined ratio of 89.8% (lowest was better) during the last reported quarter, compared favorably to 92.3% during the same period in 2020.
ORI also benefits from its large size, which drives the company’s operating leverage. As shown below, ORI has a B+ profitability rating, driven by a high gross profit margin of 73%, well ahead of the sector average at 63%, and thanks to its industry-leading 23% return on common stock, which is double Approximately 12.8% is the sector broker.
(Source: Find Alpha)
Looking to the future, I see the potential for ORI to extend the gross margin advantage through the use of technology in the address closing process. There appears to be plenty of room for margin expansion on this front, as digital shutdowns still represent a small portion of the industry total, as management noted during their recent conference call:
In our technology group, Pavaso remains the market leader in the number of digital closings completed. We have seen an increase in digital closings, although at this time, less than 5% of all closings in the industry are done digitally. We are constantly investing in the platform, planning for future expansion and greater adoption of digital closings across the industry.
Another part of our digital roadmap recognizes and addresses the need to optimally serve our agents through an interconnected ecosystem of external partners and technologies that interact and exchange information throughout the entire business process. The number of options, partners and technologies has grown rapidly and will accelerate in the future.
Meanwhile, ORI maintains a strong BBB+ rated balance sheet with a reasonably low debt-to-equity ratio of 20%. It also offers a healthy 3.5% return on earnings that is covered by a low payout ratio of 30%. As such, I expect ORI to maintain its dividend aristocracy.
ORI’s risk includes fluctuations in the valuation of its stock portfolio (ORI invests premiums in securities like any other insurance company). This risk is mitigated by the fact that 71% of the stock portfolio is invested in highly rated bonds, with the remaining 29% allocated to large cap stocks.
Other risks include higher-than-expected insurance claims, and the fact that the property insurance business is sensitive to the housing market and interest rates. As such, a slowdown in housing demand along with rising interest rates can affect ORI’s ownership sizes.
I see value in the ORI considering all of the above at the current price of $25.49, with a forward PE of 8.8x, still well below the regular PE of 12.3x over the past decade. Sell-side analysts have a consensus rating of buy with an average target price of $30, indicating a one-year potential total return of 21% including dividends.
(Source: Quick Graphs)
The Old Republic has produced reliable income for its investors for decades. Its business has benefited greatly from low interest rates and the current strong demand for housing. Looking ahead, I see plenty of opportunity for margin expansion as management moves toward further digitization of the title closing process. Meanwhile, I see value in ORI based on current assessment, quality of work, and reliable income.