Dividend Investing: Mercury General Corporation (MCY)

The Company's operating results and growth have allowed it to consistently generate positive cash flow from operations, which was approximately $189 million and $65 million in 2009 and 2008, respectively. Cash flow from operations has been used to pay shareholder dividends and to help support growth. The dividend has grown over the last five years at a compound annual growth rate of 7.8%, and currently yields 5.29%.

At the current stock price of $44.48, Mercury is trading on an undemanding PE ratio of 6.11 and a somewhat generous price to book value of 1.38 times. Caution however must be warranted given the extraordinarily high profits the company realized in fiscal 2009 resulting from realized gains of $341 million. This was however after a realized loss of $551 million in 2008 during the height of the financial market crisis. On normalized basis earnings were around about $3 per share (this excludes unusual items such as realized gains or losses on large parts of an insurance company's equity portfolio, as well as a subsequently adjusted tax rate). That puts the company on a historical PE of about 14.82 times.

However the company is on a less than 6 times price to cash flow and a price to sales ratio of 0.78, which indicates investors can pick up more sales per share for a lower price. The outlook in terms of investment returns is set to prove and the underwriting margin should also normalize after relatively high claims during fiscal 2009.

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