Investing in Swiss insurers for their dividends: Is it a good idea?

In Switzerland, the insurance sector is one of the most flourishing. It generates approximately 4% of the country's revenues according to a recent study by the independent research institute BAKBASEL. The sector would also have, according to this study, resisted the crisis rather well. At first glance, Swiss insurers can represent opportunities in that they pay rather generous annual dividends (4,21% yield on average): the seven insurers listed on the Swiss stock exchange pay dividends and are financially solid companies, having all been founded during the 19th century.

The table below includes the list of these insurers, in alphabetical order, including the stock symbol, capitalization, a price variability indicator (Beta) and the price/earnings ratio (P/E).

Company	Symbol	Capitalization	Beta	P/E (ttm)
Bâloise Holding	BALN	3.48 billion	1.18	10.92
Helvetia Patria Holding	HELN	2.52 billion	1.72	10.54
Schweizerische National-Versicherungs-Gesellschaft (Swiss National)	NATN	657.05 million	0.79	9.08
Swiss Life Holding	SLHN	3.71 billion	2.05	58.84
Swiss Re	SREN	18.88 billion	2.27	6.64
Vaudoise Assurance Holding	VAHN	253.51 million	0.73	8.72
Zurich Insurance Group	ZURN	25.53 billion	1.33	10.32

Note. mio = millions of CHF, mia = billions of CHF. The beta index covers the last five years. The P/E is calculated over the last twelve months (P/E ttm).

Below I provide a description and then an analysis of the dividends paid by each of the seven insurance companies as well as some additional financial information defined in the note below (return on equity [Return on equity] and evolution of earnings per share [Earning per share]). Information on dividend amounts comes from company websites (pages investor relations). It is often difficult, if not impossible, to find complete information on dividend payments going back more than 10 years. As such, I do not guarantee that the dividend histories reported in this article are complete. Other financial information is taken from the site www.ft.com.

Note: The return on equity ratio is an indicator of a company's profitability; it informs the profit generated by the money invested by the shareholder. This ratio is expressed as a percentage and is interpreted by comparing the values between companies in the same field of activity. The evolution of earnings per share over five years indicates the rate of increase or decrease in earnings per share. An increasing rate indicates positive dynamics and suggests that the dividend would be able to grow with profits.

Bâloise Holding AG

 This company was founded in 1863. It has been paying dividends for at least ten years (see figure below). The dividend yield, currently at 4.40%, is high compared to the yield generally observed for Swiss companies. For comparison, the average yield of SMI companies is around 2.75%.

Figure 1. History of dividend amounts paid by Bâloise Holding AG

It should be noted, however, that the dividend amount has not increased since the payment related to the 2007 financial year; this represents six consecutive financial years without dividend growth. The distribution ratio stands at 51,53%, which suggests that the dividend can be maintained. Return on equity amounts to 10,05% and the change in earnings per share over the last five years is negative: -9,73%.

Helvetia Patria Holding AG

The company was founded in 1858. Dividends have been paid to shareholders for at least nine years. The current dividend yield is 3.98%.

Figure 2. History of dividend amounts paid by Helvetia Holding AG

With the exception of a dividend reduction of 10% between the 2007 and 2008 financial years, the amount has been regularly increased. The distribution ratio amounts to 43,32%, which suggests that the dividend can be maintained. Return on equity amounts to 9,55%. The evolution of earnings per share over the last five years is negative: -3,34%.

 Schweizerische National-Versicherungs-Gesellschaft AG (Swiss National)

 The "Nationale" celebrates its 130th anniversary this year. It has been paying dividends for at least ten years. The current yield is 3.96%.

Figure 3. History of dividend amounts paid by Schweizerische National-Versicherungs-Gesellschaft AG

With the exception of a decrease in the dividend between the 2007 and 2008 financial years, the amount has been increased regularly and appreciably. The distribution ratio amounts to 36,39%, which suggests that the dividend can be maintained. The return on equity amounts to 12,31%. The evolution of earnings per share over the last five years is 1,49%.

 Swiss Life Holding AG

 Also founded in the 19th century (1857), this company pays a dividend with a current yield of 2.54%. This rate must be interpreted in light of the increase in the share price of 80% over the last twelve months (!), which is reflected in the P/E ratio currently at 58.84. In comparison, the other six insurers have P/E ratios between 6 and 11.

Figure 4. History of dividend amounts paid by Swiss Life AG

Although Swiss Life has paid dividends since 1997, they have been anything but regular. In fact, the 2001 to 2003 financial years saw a dividend cut. On the contrary, the 2007 financial year, the 150th anniversary, was crowned with an exceptional dividend. The payout ratio amounts to 159.65%, which suggests that the dividend is in danger. The return on equity amounts to 0.93%. The evolution of earnings per share over the last five years is negative: -32.85%.

Swiss Re AG

This company founded in 1863 is one of Warren Buffet's investments, who owns 3% of the shares, via the holding company Berkshire Hathaway. A dividend has been paid for at least twenty years. Currently, the yield is 5.15%.

Figure 5. History of dividend amounts paid by Swiss Re AG

 Although a dividend has been paid every year since 1993 (without fail), its amount has been drastically reduced twice: for the 2002 and 2008 financial years. Since 2009, the dividend has resumed appreciable growth. The distribution ratio amounts to 63,43%, which suggests that the dividend can be maintained. Return on equity amounts to 13,46%. The evolution of earnings per share over the last five years is 4,04%.

Vaudoise Assurance Holding AG

 This company, the smallest of the seven in terms of capitalization, was founded in 1895. It has been paying a dividend for at least 8 years. The current yield is 2.74%.

Figure 6. History of dividend amounts paid by Vaudoise AG

 The dividend amount has been steadily increasing, with the exception of a stagnation in 2009. The payout ratio stands at 40,92%, which suggests that the dividend can be maintained. Return on equity stands at 11,40%. The evolution of earnings per share over the last five years is 6,35%, the most favorable among the seven companies.

 Zurich Insurance Group AG

 This company was founded in 1872 and has the largest market capitalization among Swiss insurers. It has been paying dividends for at least 10 years. Currently, the yield is a very appreciable 6.70%. This is the highest yield in the SMI.

Figure 7. History of dividend amounts paid by Zurich Holding AG

 The payout ratio stands at 71,79%, which suggests that the dividend can be maintained, but its future increase could be limited. Return on equity stands at 11,42%. The evolution of earnings per share over the last five years is negative: -7,84%.

 Based on the information just summarized, I have categorized the companies into three groups according to their attractiveness to the dividend investor.

 The least interesting

 From the point of view of an investor in growing dividends - and therefore looking first and foremost for a dividend that is as safe as possible - two companies are in my opinion not recommended: Swiss Re and above all Swiss Life. For both companies, strong changes, including reductions or cuts, in dividend amounts have been observed over the last fifteen years, which indicates a lack of predictability. In addition, the variability of their prices is high (Beta > 2). Although Swiss Re offers an attractive yield, the highest return on equity among the seven companies and a positive earnings per share trend, it seems to me that the stock is primarily a "value" investment and not an investment for long-term dividends. Investing in Swiss Life for its dividends is clearly not a good idea. The stock is overvalued, unprofitable and its dividends are very irregular.

 The interesting ones

 In this intermediate category, I have classified two companies that have both strengths and weaknesses: Basel And Zurich. The first offers an attractive yield, a regularly paid dividend and an adequate distribution ratio. However, the dividend amount has stagnated for six years and the company has negative earnings per share. Zurich, has a similar profile: its yield is high but the dividend amount has not changed since the 2010 financial year. In addition, the earnings per share are also negative and the payout ratio relatively high. For these two companies, the probability of a future increase seems compromised to me. They nevertheless constitute solid investments.

 The most interesting

 In my analysis, the following three companies are the most interesting for the dividend investor: Vaudoise, Helvetia And Swiss National. Although the dividend yield paid by the Vaudoise is among the lowest, it is not negligible and has been growing steadily since 2005. The payout ratio, return on equity and the evolution of earnings per share all suggest that future dividend increases are possible. In addition, the moderate P/E ratio and low price volatility confirm the attractiveness of the stock. Helvetia offers a yield close to 4%, increases its dividend fairly regularly and still has some room for manoeuvre in terms of the distribution ratio. The only drawbacks are a negative change in earnings per share and a reduction in the dividend between the 2007 and 2008 financial years (this is the case for five of the seven companies). Finally, Swiss National has a yield also close to 4%, low volatility and a distribution ratio which is the lowest of the seven insurers. These three insurance companies are on my "shopping list".

 In conclusion, I would say that Swiss insurers can be good investment ideas for dividend investors. On the one hand, these companies have all been around for over a century, which shows that their business model is solid and sustainable. On the other hand, the returns are generally relatively high; however, the companies differ in their (ir-)regularity of dividends as well as the potential for variable future increases. Of course, the costs covered by insurers can differ greatly from one financial year to the next and thus the profits payable to shareholders can also vary.

  Jean-Louis