Quick post this morning on some worthwhile news this week out of my stealth dividend darling Fairfax which I posted on here.
On January 5th 2011Fairfax Financial Holdings (FFH.TO on the TSX or FRFHF.PK in the US) declared its annual 2010 dividend. The full press release is here. The 2010 dividend is $10 USD per share, the same dividend level as 2009. Based on Friday’s US closing price of $407 US per share, the dividend yield on the shares is a nice 2.5%.
I didn’t expect the maintenance of this high dividend level (at least for Fairfax) after the massive increase from the 2008 dividend of $2 to 2009’s $10. But I should know better, these guys really tend to under promise and over deliver. If they grow their book value this year at their stated goal of 15% (and the share follow suit as they usually do) then the stock will return 17.5% in 2011. I also expect Fairfax to buy back some shares in 2011.
Shares in Fairfax continue to trade right around the Q310 ending book value of $401 per share. This continues to be historically cheap and I think offers a great time to buy. Year end 2010 book value is tough to gauge. I expect their insurance businesses to still be having a rough time with combined ratios above 100% (the P&C industry is in a soft cycle). The stock portion of their investment portfolio (23%) should have done very well in Q410 but the bond portfolio (58%) may have taken a mark to market hit because of the jump in rates in Q410. Not knowing the duration of their bond portfolio makes it tough to asses the overall impact. As a long term share holder I wouldn’t mind a mark to market hit on book value that allows me to buy more shares at a discount.
One further note on valuation. Credit Suisse recently put out a report on the US P&C Insurance industry, of which Fairfax is not even covered, that contained a valuation chart that was quite telling;
I think ‘reasonable valuation’ is an understatement. I interpret that chart as saying ‘cheap’. In addition, despite the ‘reasonable’ valuation, they still don’t like the industry because of the soft pricing cycle its in. This may be fine for the average insurer but for Fairfax with its stellar investment record this kind of thinking is yet another reason to be bullish. Its being treated just like any other P&C insurer or even better is not even on their radar screen.
Finally, in mid February Fairfax will be announcing year end 2010 results which will give a much more detailed picture of 2010 results and even better will allows us to read CEO Prem Watsa’s annual letter, always a treat. I will write up a summary of the 2010 results when the time comes.
Disclosure: Long FFH
7 Comments
jim goldstein · February 3, 2011 at 11:43 am
I understood that the dividend is not “guaranteed” yearly and was considered a one time dividend with no commitment to continuing it. Does this impact your view on this stock? Thanks. Jim
libertatemamo · February 3, 2011 at 12:10 pm
Jim, true. But they say that every year. Since the majority of their income is from investments, that are subject to huge market fluctuations, they are not signing up to be a consistent and growing dividend payer – even though they may turn out to be. And no dividend of any company is ever guaranteed as we learned from the financial crisis and the likes of GE, BAC, and many others.
I didn’t buy this stock for its dividend at all. That’s just pure gravy. I did partially buy it for its internal dividend. For example, its bond heavy investment portfolio generates about a 9% dividend, as I showed. The majority of this is kept internally and used to fund new investments.
Paul
jim goldstein · February 3, 2011 at 12:13 pm
Thanks Paul. I appreciate the clarification and your views on the company. As I received your email, I was doing research on the Nuveen closed end fund you mentioned! Jim
libertatemamo · February 3, 2011 at 12:20 pm
Awesome Jim. Fairfax reports year end results two weeks from today so we’ll get a great look as to how they did in 2010 and are positioned for 2011. I plan to write up the results and update my analysis then.
Those darn muni CEFs have gone up for like 7 days in a row which is driving me nuts….
Paul
jim goldstein · February 20, 2011 at 10:38 am
Paul, in case you did not see this article on SA.
http://seekingalpha.com/article/253955-why-fairfax-financial-is-a-buy-undervalued-with-strong-management?source=hp_latest_articles
libertatemamo · February 20, 2011 at 11:56 am
Thanks Jim. I hadn’t seen that article. I definitely agree with the author’s take. No surprise there.
Paul
Fairfax reports 2010 results – still a screaming buy « Investing For A Living · March 8, 2011 at 1:11 pm
[…] Prem Watsa and over the weekend it was posted to the site. I’ve posted on Fairfax before (here and here) and I called them a great stealth dividend stock. Well, despite posting […]
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