The latest insurance stock that has caught our eye is Unum Group (UNM) which is closing in on a 3-year low. Prior to 1998, Unum Group had a dividend increasing history of 11 years at a compounded annual growth rate of 17.66% according to Moody’s Handbook of Dividend Achievers. After 1998, Unum was challenged significantly resulting in a deep reduction of the dividend. Most important to investors is the fact that after the -50% reduction of the dividend in 2003, the annual dividend remained at $0.30 for six years until 2009. Since 2009, UNM has increased the dividend each year thereafter. The handling of the dividend policy is important for several reasons:
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Cutting the dividend in 2003 was an accurate move by management since the book value declined -31% from the 2002 high to the 2008 low.
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As a financial services company, keeping the dividend the same through the financial crisis of 2007 to 2009 meant that the management team believed that stability had returned to the company.
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Raising the dividend after the financial crisis means that the management team believed the prospects for the company were improving. After 2008, the book value for UNM has increased +51% which supports management’s decision.
We welcome a dividend cut when appropriately applied, even if the conditions that brought on the cut were based on management’s prior “bad” decisions. In our view, the true test of any management team is not always generating blowout earnings but handling errors in an appropriate fashion. UNM’s management has done all the right things at all the right times relative to the economic backdrop that we’ve experienced.
However, while we favor the actions of the management at Unum Group, we also need a sense of perspective on the most opportune time to actually buy the stock. Two things that never change regarding the historical information on a stock is the dividend paid and the stock price. This is why we prefer to look at Edson Gould’s Altimeter which reflects the stock price relative to the dividend that is paid.
From our perspective, the movements of Gould’s Altimeter indicate that the stock should be bought at or below 148 and sold above 315. Each time UNM has traded below or above the respective range, the following increase or decline followed:
| Date | Altimeter | stock price | buy/sell | % change |
| 2/25/1997 | 431.69 | 39.5 | sell | -59.97% |
| 2/10/2000 | 106.82 | 15.81 | buy | 52.12% |
| 1/27/2006 | 320.67 | 24.05 | sell | -60.58% |
| 11/20/2008 | 126.40 | 9.48 | buy | 178.59% |
| 4/14/2010 | 318.19 | 26.41 | sell | ???????? |
| ????????? | 148.00 | 15.54 | buy |
While we can’t be certain that UNM will replicate prior declines, a decline to the projected level of $15.54 seems well within reach as the stock currently trades at $19.26. This would only be a decline of -41%, which is far less than previous Altimeter lows of –59% and –60% in 1997 and 2006, respectively.
According to Dow Theory, UNM would reach the 50% level at a price of $17.33. Typically, the 50% level is the “make or break” level in the stock’s price. If the stock can manage to stay above $17.33, then a majority of the shareholders since the 2009 low would be satisfied enough not to abandon the stock. However, if the stock falls materially below the $17.33 level (say $17 or $16.50) then it would mean that most “long-term” holders of the stock are experiencing a loss and are seriously contemplating selling the stock. The Dow Theory downside targets are as follows:
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$14.08
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$10.84
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$7.60
Although UNM could be bought at $15.54 based on Gould’s Altimeter, it should be understood that there are likely to be further declines. Therefore, an investor should not become disenfranchised with Dow Theory downside targets. Instead, investors need to allocate appropriate amounts of capital and break up the intended purchase into 2 or 3 transactions.