Brown & Brown (BRO) is an insurance brokerage. The company sells insurance policies to commercial, professional, and individual customers. Brown & Brown was founded in 1939 and has grown to reach a market cap of $4.6 billion.

Company name is a member of the Dividend Achievers Index. Brown & Brown has increased its dividend payments each year since 1993. The Dividend Achievers Index is comprised of businesses with 10 or more consecutive years of dividend payments. You can see the current list of all 238 members of the Dividend Achievers Index here. The image below shows the company’s dividend growth since 1993.

This article will look at Brown & Brown’s current events, competitive advantage, and future growth prospects. The company will be examined using The 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing take a systematic approach to building a high quality dividend growth portfolio.

Business Overview

Brown & Brown operates in 4 segments: retail, national programs, wholesale brokerage, and services. The percentage of total revenue generated for Brown & Brown by each segment in the company’s latest quarter is listed below:

• Retail percent of total revenue: 53%
• National programs percent of total revenue: 25%
• Wholesale brokerage percent of total revenue: 12%
• Services percent of total revenue: 9%

The retail segment is the company’s largest, responsible for over half of the company’s revenue. The retail segment includes 3,700 retail professionals operating out of 100 locations in 34 states, Bermuda, and the Caiman Islands. The retail segment sells policies to small and mid-sized businesses and individuals.

The national programs segment is the company’s second largest. The segment partners with insurance carriers and handles underwriting, policy issuance, billing, and in some cases claim handling. The segment offers insurance policies targeted toward specific niche industries, trade groups, and professions.

The wholesale brokerage segment services customers that fall outside of the ‘normal’ types of insurance. Brown & Brown has 330 wholesale brokers and is one of the 10 largest wholesalers in the world.

Brown & Brown’s service segment offers specific services individuals, businesses, and insurance carriers. Services offered include: claims handling and management, social security advocacy, Medicare enrollment support, and Medicare compliance. The services segment is Brown & Brown’s smallest, responsible for just 9% of total revenue in the company’s first quarter of fiscal 2015.

Competitive Advantage

Brown & Brown operates in the insurance industry. The insurance industry has unique benefits. Insurance is one of the slowest changing industries imaginable. Potential customers will always have risks that need to be covered. Insurers will be there to profitably cover these risks. Advances in technology do little to change the core aspects of insurance.

Brown & Brown partners with insurers to sell their products and provide services. The company’s size, longevity, and connections form the company’s competitive advantage. Brown & Brown’s competitive advantage is not as strong as many other businesses that have paid increasing dividends for long periods of time. Still, the company’s conservative management and presence in a slow changing industry are enough to produce steady gains over long periods of time.

Current Events & Growth Prospects

Brown & Brown has been mediocre for much of the last decade. From 2005 to 2011, the company grew earnings-per-share at just 0.8% a year. Since 2011, the company has grown at a more rapid pace.

Brown & Brown has grown earnings-per-share at 7.9% a year since 2011. The company’s significant uptick in growth comes primarily from acquisitions. Brown & Brown is now using bolt-on acquisitions to fuel growth. The image below shows how important acquisitions have been to the company in the last 3 years:

Brown & Brown’s growth since 2011 is a result of an acquisitions binge. The company has spent more on acquisitions than it has taken in from cash flows in each of the last 3 years. As a result, the company expanded its credit facility and issued corporate bonds for the first time in its history.

Brown & Brown has continued acquiring smaller insurance businesses in 2015. On May 11^th, the company acquired Bellingham Underwriters, an underwriter for transportation risks with $4.6 million in annual revenues. In March, Brown & Brown acquired Spain Agency. Spain Agency sells personal and commercial insurance lines in the state of New York. The company has annual revenues of $6.5 million. Other acquisitions in 2015 include:

• Liberty Insurance Brokers with annual revenues of $4.0 million
• Hall-Wright General Agency with annual revenues of $1.6 million

The standard acquisition strategy for Brown & Brown is to acquire smaller insurance brokers and have the employees of the acquired company continue to do business as usual. This grows Brown & Brown’s top and bottom lines while providing a sizeable payout for the owners of the smaller brokerages.

Brown & Brown showed mediocre adjusted earnings-per-share growth of 5.3% in its most recent quarter. While earnings-per-share did not show rapid growth, revenue did increase significantly.

The company saw revenue increase 11.2% versus the same quarter a year ago. Organic growth accounted for about 1/3 of growth, while acquisitions were responsible for the other 2/3 of revenue growth. As discussed above, bolt-on acquisitions are the primary growth driver for Brown & Brown.

11.2% revenue growth with only 5.3% adjusted earnings-per-share growth shows that margins shrank for Brown & Brown in its most recent quarter. The company’s expenses outpaced revenue growth. Total expenses grew 12.2% on the quarter. Interest expenses more than doubled from $4.1 million to $9.1 million. Employee compensation and benefits also grew at 11.5%, slightly faster than revenue growth.

Recession Performance

Brown & Brown has performed well during recessions. The company’s earnings-per-share each year through the Great Recession are shown below:

• Earnings-per-share in 2007 of $1.35
• Earnings-per-share in 2008 of $1.17
• Earnings-per-share in 2009 of $1.08

Earnings-per-share did decline for the company during the Great Recession. The maximum drawdown in earnings for the company was 20%. An earnings decline of 20% during the worst recession since the 1930’s shows Brown & Brown can generate profits in difficult economic times.

The 8 Rules of Dividend Investing

The sections below will compare Brown & Brown to other businesses with a long history of dividend increases using the 5 Buy Rules from The 8 Rules of Dividend Investing. Each rule has a short ‘why it matters’ section, explaining why the rule is relevant.

Rule 1: 25+ Years of Dividends Without A Reduction

Brown & Brown has paid increasing dividends for 22 consecutive years. The company falls just short of the 25+ years of steady or increasing dividends required to be eligible for inclusion in the Sure Dividend database. Brown & Brown will still be compared to other businesses with 25+ years of dividend payments without a reduction to show where the company would rank if it did pass the first rule of dividend investing.

Why it matters: The Dividend Aristocrats (stocks with 25+ years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet

Rule 2: Dividend Yield

Brown & Brown currently has a dividend yield of 1.4%. The company’s dividend yield is below the S&P 500’s. Brown & Brown has the 139^th highest dividend yield out of 163 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Rule 3: Payout Ratio

Brown & Brown has a low payout ratio of just 23%. The company’s low payout ratio gives management plenty of room to grow dividend payments faster than earnings-per-share. Brown & Brown has the 11^th lowest payout ratio out of 163 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Rule 4: Long-Term Growth Rate

Brown & Brown struggled to grow earnings-per-share for much of the last decade. The company has seen solid revenue-per-share growth of 7.7% a year over this time, however. Brown & Brown has the 34^th highest growth rate out of 163 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Rule 5: Long-Term Volatility

Brown & Brown’s stock price volatility of 25.5% is the 60^th lowest out of the 163 businesses with 25+ years of dividend payments without a reduction. The company’s stock price volatility is slightly better than average, reflecting the slow-changing nature of the insurance industry.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race

Final Thoughts

Brown & Brown has a clear growth plan – acquire smaller insurance brokerages. The company is also very committed to paying shareholders increasing dividends thanks to its more-than 2 decade streak of consecutive dividend increases. On the downside, the company has a below average dividend yield and appears to be trading around the high-end of fair value with a forward price-to-earnings ratio of 17.1.

If Brown & Brown passed the first rule of dividend investing, the company would rank in the top 50% using The 8 Rules of Dividend Investing thanks to its solid-if-unspectacular growth potential, better-than-average stock price standard deviation, and low payout ratio. The company offers dividend growth investors above-average dividend growth potential over the next several years.