7.5% Yielding Stock: Buying Opportunity Or Falling Knife?

In my search for value I came across AmTrust Financial Services (AFSI), a property/casualty insurer that specializes in providing coverage for small businesses. Aside from a recent selloff, the stock has significantly outperformed the Dow Jones U.S. P/C insurance stock index since the IPO in 2006. In this article we will examine the company to determine whether AFSI is a buying opportunity or a falling knife.
Investment thesis: AFSI's dividend looks good but company needs better cost control for the dividend to be sustainable and stock to rebound
Financial statement analysis Poor fundamentals usually means poor stock performance. While top-line revenue has grown over time as insurance premiums, interest, and investment gains have all appreciated, expenses have correspondingly grown. This has resulted in steadily decreasing profit. It's finally reached the point where common shareholders had negative profit at the end of Q3 2017.
Increased expenses that jump out are loss, loss adjustment, and underwriting. These three indicate that while new business is being generated, they are paying out more to investigate and cover losses. While that could very well be a string of back luck, that could also indicate that the company is lowering its underwriting standards to bring in new (risky) business.
Assessing the quarterly dividend While the financials and stock performance have suffered lately, the question is whether the 7.5% dividend yield is fool's gold or cash... Read more

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