What’s Dividend.com’s “Baby Buffett-Styled Stock” that “Features Years’ Worth of Dividend Growth”

A pitch for their premium service says that this teased stock "Features Years’ Worth of Dividend Growth" -- so what's the story?

By Travis Johnson, Stock Gumshoe, September 3, 2020

The latest teaser for Divide.com’s Premium service ($149/yr) had a headline that caught my eye: “Discover How Our Latest Best Dividend Pick in Insurance Space Is Thriving in the Pandemic”

Who wouldn’t be interested in that, right? The insurance business is under scrutiny and pressure to some degree because of coverage (or lack thereof) for lost business due to pandemic shutdowns, but in general has been strong for years and earned its title as “best business in the world”… and, of course, good ol’ Warren Buffett is the poster child for “insurance wealth.”

Here’s a little more from the ad:

“People forget that Berkshire Hathaway is actually an insurance company. That’s because we often focus on its mix of stocks, businesses and other assets. But the reason why Warren Buffett loves the structure and why Berkshire is able to buy all those stocks comes down to float. Insurance companies are forced to place paid premiums into various assets to cover potential claims. These assets earn interest and insurance companies can do whatever they want with that interest and some of the premium funds. This is called float and makes for a free stream of money for shareholders. It’s what has helped Berkshire build a huge empire.

“It’s also helped our latest Best Dividend Stocks List pick win as well.”

Aha! So what is that latest addition to the “Best Dividend Stocks” list? We get a few clues…

“Our new pick is a global leader in the insurance and risk management sector, operating in more than 150 countries worldwide. This focus on underwriting, insurance brokerage and similar products for wholesale and retail clients has continued to build up an impressive empire.”

OK, so that clears it up that we are really talking about a company in the insurance business… and if it’s in 150 countries it has to be one of the larger firms… but that’s not enough, how about more clues?

“Our pick has been able to raise its payout by over 40% since the end of the Great Recession….

“Healthy payout ratio of 42% and growing yield of 1.70%.”

OK, so a decent and easily supported dividend. “Payout ratio” just refers to how much of the income is paid out in the form of a dividend — companies always need capital to grow and reinvest in the business, so you don’t want a payout ratio too high. 42% is quite low, which means the dividend should be very safe.

Then we get a little more info on what kind of company this is…

“One of the largest insurance brokerage firms, and pulling in more than $5 billion in sales last year.”

Hmmm, so that makes this a little odd — and somewhat like Dan Ferris’ pitch last week, in that it’s implying that an insurance broker has “float” and underwriting income. That’s technically true, I guess, brokers often share a little bit in underwriting profit, that’s one of the ways they are incentivized to bring profitable business to insurers, but the vast majority of the revenue at a brokerage firm comes in the form of commissions from insurance companies for selling policies. Brokers are middlemen, traditionally, they just take a bite off the top before passing the money along to the insurance company… it’s the actual insurer that profits from float and a huge investment portfolio.

Some more detail about this secret company? I thought you’d never ask! More from the Dividend.com spiel…

“… our selection is focused on several high-growth areas, including diving head first into higher-margined consulting business lines as well as owning renewable energy assets with its float. Those clean energy assets are providing plenty of tax savings and boosting profits even further. Bolt-on M&A in the insurance brokerage business is also helping assert our pick’s dominance in the sector.”

And since this is Dividend.com, they focus a lot on that payout — the final clue is that they’ve increased the dividend for ten years straight, with the last increase being “nearly 5%”

So what’s our secret stock? This is, sez the Thinkolator, huge multinational insurance broker Arthur J. Gallagher (AJG), which I also own a few shares of personally. And yes, they are ex-dividend today — the current dividend is 45 cents a share, but you had to own the stock as of yesterday to get that payment. If you’re excited about this one primarily for the dividend, you’ll have to wait a few months for the next one (not a big deal — the stock routinely moves by a dollar or two in any given day and the dividend is fairly small, so being patient about a buy point is more important than getting in before a particular dividend payment).

Here’s how the company describes itself:

“Arthur J. Gallagher & Co. an international service provider plans, designs, and administers a full array of customized, cost-effective property/casualty insurance and risk management programs. The company also furnishes a broad range of risk management services including claims and information management, risk control consulting and appraisals to help corporations and institutions reduce their cost of risk. In addition, the company assists clients in all areas of their employee health/welfare and retirement plans, including plan design, funding and administration.”

And, to further match those clues…

“Gallagher has operations in 49 countries and, through a network of correspondent brokers and consultants, Gallagher offers client-service capabilities in more than 150 countries around the world. Some of the company’s offices are fully staffed with sales, marketing, claims, loss control and other specialists; some function as servicing offices for the various divisions.”

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So why look at this one today? Well, mostly just because I’m finding this to be an interesting trend… growing interest in insurance broke