This Dividend 'Blue Chip' Will Catch You When You're Down

We believe the term blue-chip stocks should be applied to companies that have maintained long histories of raising their dividends each year -- stocks that have at least 10-plus consecutive years of annual dividend increases. Why? A long track record of consistent annual dividend growth indicates a company with strong brands, durable competitive advantages, and a proven history of generating growth over the long run.

A good example is The Travelers Companies (TRV) . The firm has a long history of paying dividends to shareholders, and has increased its dividend each year for more than a decade. The company recently raised its dividend again, and has an attractive yield of 3.3%, with the ability to grow its dividend even in troubled times.

Strength in an Uncertain Climate

The Travelers Companies was founded in 1864 in Hartford by two local businessmen. The company began with life and accident insurance, but has expanded into various other types of coverage in the 150-plus years since then. Today, it generates $30 billion in annual revenue and has a $26 billion market capitalization. The company offers a wide and deep variety of protection products for auto, home and business customers.

The environment for insurance companies like Travelers is highly challenged right now. Broadly, the U.S. economy is facing a recession in 2020. Economic downturns are widely negative for financial sector stocks, as recessions result in less economic activity and demand for financial products. The climate is even more uncertain for insurers, specifically, as they may face higher claims in a pandemic. If that weren't bad enough, near-zero interest rates mean insurance companies will see declines in investment income.

But despite all these pressures, Travelers has continued to report steady profits and raise its shareholder dividends, even during the coronavirus crisis. On April 22, the company reported financial results for the 2020 first quarter. Earnings-per-share declined 7% year-over-year, due to higher catastrophe losses. But the company reported strong net written premiums of $7.35 billion, a 4% year-over-year increase. This showed strong underlying demand for the company's financial products.

Travelers remained highly profitable, with core earnings-per-share of $2.62 for the first quarter. Achieving stable profitability is key to a company's ability to return cash to shareholders, even when business conditions deteriorate. This allowed Travelers to return $681 million to shareholders during the quarter, through dividends and share repurchases.

Insuring Shareholders With Dividend Growth

Along with the company's first-quarter report, Travelers announced a 4% dividend increase. The company has increased its dividend for 16 consecutive years. This dividend increase is even more important, given the coronavirus crisis and the likelihood of a severe recession occurring in 2020. In times like this, investors should look to high-quality companies that have strong balance sheets and leadership positions in their industries, such as Travelers. The company saw broad-based growth last quarter. All segments contributed to growth. Renewal premiums increased nearly 8% in Business Insurance, as the company benefited from positive rate changes. Elsewhere, net written premiums increased 13% in bond and specialty Insurance, reflecting strong production across the management liability and surety businesses. In personal insurance, net written premiums increased by 8%.

Therefore, Travelers has a uniquely strong brand in the insurance and financial services industry. It also has a strong balance sheet, which will help the company navigate these troubled times. Travelers has a reasonable debt-to-capital ratio of 21.9%, comfortably within its target rate. It also has a low level of debt maturities in the next several years, with just $500 million in 2020 and no maturities from 2021 to 2025.

And, Travelers' investment portfolio is mostly comprised of quality securities. At the end of the most recent quarter, the company had a total investment portfolio of $76.7 billion, 94% of which is in fixed income. Within the fixed income portfolio, just 2% of maturities are below investment-grade. Travelers has taken adequate steps to de-risk its investment portfolio, and has made sure that it is underexposed to sectors that are especially vulnerable to Covid-19 related distress.

Travelers: Recession-Resistant Blue Chip

A focus on a high-quality investment portfolio and a low level of debt has served Travelers and its shareholders well, especially during recessions when balance sheet strength becomes even more important. During the Great Recession of 2008 to 2009, the company remained profitable and continued to increase its dividend, a highly impressive performance in a very difficult financial crisis. In 2008, Travelers reported a 22% decline in earnings per share, but quickly recovered with 21% earnings growth in 2009. The company has the ability to navigate recession much better than many other insurance companies, and was one of the biggest beneficiaries of the ensuring economic recovery after the Great Recession ended.

No two recessions are identical, but Travelers' track record of strong performance in economic downturns bodes well for shareholders this time around. The coronavirus crisis is a significant headwind for many industry groups, but best-in-class insurers should be able to maintain their dividends. Some, like Travelers, will be able to continue increasing its dividend. For income investors in search of high yields and consistent dividend growth, Travelers looks attractive thanks to its resilient dividend growth and 3.3% dividend yield.

Disclosure: No positions in any stock mentioned