Sometimes your eyes deceive. The stated dividend yield on financial portals says 2%, but the real dividend yield approaches 10%.
I refer to the stated dividend yield on ProAssurance Corp. (NYSE: PRA), a mid-cap property & casualty insurer that focuses on health care and workers’ comp. Most financial portals calculate the yield based on ProAssurances’ regular dividend — paid at the rate of $1.24 per share annually. (ProAssurance began paying a quarter dividend in 2011. The ProAssurance dividend has grown at a 16.3% average annual rate since.)
So, what are the financial portals overlooking?
ProAssurance’s “regular”special dividends. Each year, ProAssurance supplements its regular dividend with a special dividend. The latest special dividend, $4.69 per share, was paid Jan. 9, and was exceptionally remunerative. It lifted ProAssurances’s dividends paid over the past 12 months to $5.93 per share and the yield on those dividends to 9.9%.
The Role of Special Dividends
I find the ProAssurance special-dividend policy intuitively pleasing, because my intuition was honed in my formative investing years by Benjamin Graham, the father of value investing. Graham was a table-pounding advocate for dividends.
Graham pounded the table for dividends for two reasons: 1) Dividends are a requisite variable in valuing investments; and 2) dividends help ensure that return on investment remains high. Excess cash lowers return on investment and leads to waste and empire-building.
Graham’s insights on dividends permeate ProAssurance’s culture. Management is unfaltering in moving excess cash from the balance sheet and into the pockets of its owners — the shareholders. ProAssurance has returned $1.7 billion to shareholders through share buybacks and dividends (special and regular) over the past 10 years.
In the past four years, shares outstanding have been reduced 13.4%; the regular dividend (which excludes special dividends) has more than doubled.
With the cash left after dividends have been paid and shares bought, management has grown the business. ProAssurance has spent $750 million on strategic acquisitions since 2007. ProAssurance has grown to underwrite insurance in all 50 states and three countries. Since 2009, premiums earned have increased to $704 million from $498 million, a respectable 5% average annual increase.
That said, the investment allure resides in capital-structure management, not growth. Capital-structure management includes dividend management.
Unusual ProAssurance Dividend Policy
The dividend policy, I’ll concede, defies conventional logic. ProAssurance pays a dividend – regular and special – that frequently exceeds reported earnings. For instance, the $5-per-share special dividend exceeds trailing 12-month earnings ($2.45 per share) by $2.55.
The special-dividend policy appears profligate, and yet it works to create shareholder value. ProAssurance appears to pay excessive special dividends, yet it maintains an “A+” rating with A.M Best and an “A” with Fitch. It is one of the highest-rated insurers in its industry.
But the real proof the dividend policy works is in total shareholder return. Through a combination of share-price appreciation and special and regular dividends, ProAssurance shares have provided a generous total return – exceeding 2,600% – over the past 25 years. Over the same period, its share price is up over twenty-fold, appreciating at an average annual rate of 13%.
ProAssurance shares have been trading higher since the latest special-dividend declaration. They’re up 7%. This is no surprise. Hidden gems don’t stay hidden forever. ProAssurance is a gem, and it’s one I expect to shine again with the announcement of its next wealth-enhancing special dividend in December.