BROWN & BROWN: A NEW DIVIDEND ARISTOCRAT

By Luis P. Lopez, Equity Analyst 

Brown & Brown, Inc. (NYSE: BRO) provides insurance, reinsurance services, and risk management solutions to government, non-government, businesses, and individual clients. The Company generates revenue by selling insurance products and services created for property, employee benefits, and casualty areas. In this article, we will analyze Brown & Brown’s business, its dividend history, recent stock performance, quarterly and full-year financial results, and other important aspects of its business to determine whether it can sustain its dividends. 

Brown & Brown’s Business

The Company divides its operations into four business segments: Retail, Wholesale Brokerage, Services, and National Programs. The Retail segment offers insurance products and services to individual customers, commercial, public, and quasi-public organizations. The Wholesale Brokerage segment sells surplus personal and commercial lines through independent brokers and agents. The Services segment of the company administers third-party claims and provides management services for medical utilization. The National Programs segment provides professional liability packages, specialized products, and different insurance products for professionals, individuals and specific industries. Brown & Brown may just be the most important company you have never heard of. 

Dividends

The Board of Directors of Brown & Brown Inc. declared a quarterly cash dividend of $0.1025 per share, which is payable on February 16, 2022. At its current share price of $65, the stock’s dividend yield stands at 0.63%. 

The company has increased its dividends consecutively for 28 years. Recognizing the company’s feat, the S&P Dow Jones Indices added the company to the S&P 500 Dividend Aristocrats Index on February 1, 2022. The S&P 500 Dividend Aristocrats is an esteemed group of S&P 500 constituent companies that have a history of raising dividends consecutively for a minimum of 25 years. The company became part of the S&P 500 index in September 2021. 

Brown & Brown Stock Performance

At its current price of $65.6, Brown & Brown stock has gained over 48% or $21 per share over the past 12 months. The stock is trading near its all-time high of $70.28. Over the past five years, the stock has tripled in value as it rose from $21 to its current value of $65, gaining over 200%. At its current price of $65, Brown & Brown stock has a trailing twelve-month P/E ratio of 32, which means that the stock is trading at 32 times its earnings per share. The company has a market capitalization of $18.53 billion at a share price of $65. 

Q4 and FY 2021 Results

Brown & Brown Inc, reported strong fourth-quarter 2021 and annual 2021 results. The company posted revenues of $738.5 million in the fourth quarter of 2021, which is an increase of $96.4 million or 15% from the same quarter of last year. During the quarter, the commissions and fees increased by 15%. The net income in the quarter stood at $101.7 million, increasing by 4.5% or $4.4 million from the year-ago quarter. 

Revenues for the full year 2021 were 3.05 billion, increasing by 16.8% or $438 million in comparison with 2020. Commissions & fees and organic revenue also registered year over year growth of 16.9% and 10.4%, respectively. Net income for the year 2021 also increased by a healthy 22% or $106.6 million to $587.1 million, compared with the year 2020. Diluted earnings per share (Adjusted & Unadjusted) came in at $2.07 and $2.19, recording a healthy year over year increase of 31.1%  and 22.5% respectively. 

The solid growth in the company’s business was possible due to rate increases, new businesses, and high retention. The retail segment, national programs, and wholesale unit all delivered healthy organic growth. Also, the esoteric nature of some of the company’s business to business insurance offerings means that competition is limited. The fact that Brown&Brown is not a household name allows them to quietly dominate a lucrative niche. In the fourth quarter of 2021, the company completed eight acquisitions, resulting in an increase of $67 million in annual revenues. In the full year 2021, the company completed 19 acquisitions that contributed $132 million in annual revenues cumulatively to the company’s topline. 

Conclusion

Brown & Brown is a dividend aristocrat that has been raising its dividends consistently for over 28 years. It reported strong Q4 2021 and full-year 2021 results, generating healthy double-digit overall growth in revenues and earnings. Annual operating income also increased by a hefty 27%. Its 5-year annual dividend growth currently stands at 8.96% compared with the 5-year annual revenue growth rate of 9.49%. This means that revenue has been outpacing the dividend growth rate by around 50 basis points, which is an encouraging sign for sustainability and growth of dividends. 

The stock has already gained 48% over the past 12 months, which shows that investors have been cheering the company’s strong financial results. The company has made a total of 19 acquisitions during 2021, which points to the strong financial position of the company. The fact that the company’s share price has tripled over the last 3 years has left the dividend yield looking paltry, at less than 1%. But in reality, the dividend has been rising. The share price has simply been rising faster, which makes the dividend yield look low. A good problem to have! 

At its current price of $65, the stock is trading at around 31 times its EPS of $2.09. While the P/E ratio of 31 might portray the stock as expensive, strong fundamentals of the stock justify the premium price. As Warren Buffett famously said, “Better to buy a great business at a fair price, than a fair business at a great price.” The dividend growth of the stock is sustainable because of the robust growth in the company’s revenue and profitability. This might be one to buy and hold onto for the long haul.