Why Intact Financial Corporation Could Easily Cross $100

There’s a strong chance Intact Financial Corporation (TSX:IFC) stock will end 2017 in the green.

| More on:

Intact Financial Corporation (TSX:IFC) is having a pretty quiet year so far. Shares of Canada’s largest property and casualty insurance company have lost roughly 3% year to date. A bigger part of the decline came after the company announced its plans to acquire OneBeacon Insurance Group, Ltd (NYSE:OB) earlier this month. While Bay Street appears to be unsure about what to do with Intact Financial shares, analysts at Bank of Nova Scotia just raised their price objective on the stock to $107, representing nearly 15% upside from current prices.

While I usually take analyst ratings with a grain of salt simply because they can change even before I book my next trade, I have to agree with Bank of Nova Scotia on Intact Financial’s prospects. Yes, investors, Intact Financial looks compelling right now for three big reasons.

The acquisition could be a game-changer

On May 2, Intact announced it will acquire U.S.-based OneBeacon for an all-cash deal worth $2.3 billion. Intact maintains that the acquisition will be “neutral” to its net operating income per share (NOIPS) in 2018 and will generate mid-single digit NOIPS within two years of closing, which is what seems to have gotten the market wary. But investors need to consider the long-term potential.

The acquisition isn’t a small one, and investors need to understand that integration takes times in such deals, especially when it’s cross-border. OneBeacon, currently controlled by White Mountains Insurance Group Ltd. (NYSE:WTM), is present in 50 states across the U.S. It is primarily a specialty insurer that offers insurance for products that may not fall under the purview of traditional insurances, catering to customers in marine, technology, healthcare, transportation, entertainment, and financial institutions, among others.

So, I see a two-way benefit for Intact: the acquisition establishes a presence in the U.S. insurance market and strengthens its foothold in the high-margin specialty insurance market in Canada. That sounds like a win-win, as this chart from Intact’s presentation also highlights.

Chart showing how Intact will benefit from its OneBeacon acquisition.
Image source: Intact Financial

I also wouldn’t be surprised if Intact lists itself on the U.S. stock exchange some years down the line because it’ll be a much bigger entity than the already listed OneBeacon, which currently has a market capitalization of under US$2 billion.

Operational performance on track

Higher catastrophe losses have been denting Intact’s bottom line in recent quarters, but its combined ratio for Q1 was still under 100% at 98.2%.

The combined ratio reflects the strength of an insurance company’s operations, as it compares its claims and expenses as a percentage of its earned premiums. A ratio below 100% means premiums are higher and the core underwriting business is profitable. I use the word “core” here because insurance companies also earn from investments.

Intact’s Q1 premiums grew 4% year over year, return on equity stayed above the 10% mark, and book value per share grew 8% to $43.14. Book value is an important measure for insurance companies, and Intact isn’t disappointing on that front.

Attractive dividends

Despite fears that the OneBeacon acquisition could pressure Intact’s cash balance, I don’t see any reason for income investors to be wary. Intact has increased its dividend every year for more than a decade, doubling it in just eight years. It currently yields a good 2.7%.

Earlier this year, Intact hiked the dividend by 10%. Considering that management has had growth via acquisitions in mind for quite some time now, I don’t see why it would raise dividends, unless it’s confident it can maintain or grow them.

Overall, Intact is a complete package that long-term investors need in a stock. It’s a leader in its industry with an expanding book value, a strong history of returns on equity and dividends, and big growth catalysts ahead. The stock price should reflect these, giving you rich returns along the way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Neha Chamaria has no position in any stocks mentioned. Intact Financial is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold Forever

Here are 2 TFSA-worthy Canadian stocks. Which one is a good buy for your TFSA today?

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

path road success business
Dividend Stocks

2 High-Yield Dividend Stocks to Buy Hand Over Fist and 1 to Avoid

High yields are great and all, but only if returns come with them. And while two of these might, another…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Every Month

A high dividend yield isn't everything. But when it pays out each month and offers this stability, it's worth considering!

Read more »

young people stare at smartphones
Dividend Stocks

GST/HST “Vacation”: Everything Canadians Need to Know

The GST/HST "vacation" is a little treat for the holidays, along with a $250 payment. What should you do with…

Read more »