Lincoln National Corporation (NYSE:LNC) is a company worth investing in. Looking at the big picture, we see strong growth in its share price over time, which unfortunately comes with high price volatility, but that isn’t a problem for investors who buy low and sell high.
Currently, the stock price appears to be depressed, having fallen 53% from recent highs in October 2021. Historically, this appears to be a good time to buy.
The company provides a variety of insurance and retirement solutions to individuals and groups in the United States and stands to benefit greatly from rising interest rates. The P/E ratio in 2024 is only 3.6, making the stock an excellent choice for value investors.
The stock is an excellent buy because:
- Its earnings per share are expected to rise in the coming years as interest rates rise.
- The company has a consistent growing dividend and has increased its dividend per share for a long time.
- Share repurchases have reduced the number of shares outstanding, increasing shareholder value.
- Due to its recent stock price drop, it now has an extremely favorable stock price valuation.
The stock price fell due to the company’s expected poor third-quarter 2023 results, and it reached a new all-time low following the announcement that the share buyback program would be suspended in 2023. However, the company is transitioning to a leaner and more cost-effective model, and higher interest rates should boost earnings.
Temporary Headwinds Provide A Great Buying Opportunity
Lincoln National had a bad third quarter, reporting a net loss of $2.6B, or $15.17 per diluted share, despite higher interest rates. The annual review of the company’s DAC and reserve assumptions resulted in a net unfavorable notable item of $2 billion ($11.62 per share) in the adjusted operating results.
Their Annuities division saw a 33% increase in quarterly operating income, up to $449 million from the same period last year. Due to lower returns from the retirement plan business’s alternative investment portfolio and a drop in account values brought on by falling equity markets, the retirement plan business segment reported operating income of $52 million, down 13% year over year. Revenue in Group Protection was up 83% from the same period last year, with increases seen across all product lines. There was an 8% increase in premiums, which resulted in a total of $1.2 billion. In addition, the firm’s investment portfolio has maintained its strong performance, and the spread has expanded as a result of rising interest rates after years of spread compression.
Losses from operations totaled $2.2 billion for its Life Insurance business segment, down from $93 million the previous year’s third quarter. Due in large part to updated assumptions about policyholder behavior, the company’s annual assessment of DAC and reserve assumptions resulted in a $2.2 billion net adverse noteworthy item in the current quarter.
Lincoln National is well on its way to achieving its goal of a $260-$300 million annualized reduction with the deployment of an enterprise-wide expenditure strategy that is now far ahead of schedule. About 45 percent of the savings target has been met thus far.
To lessen the financial blow of any further market drops, we at BUL are investigating various hedge and structural solutions to lessen the product’s susceptibility to the market.
As a step toward mitigating the financial effect of potential further market decreases, Lincoln National Corporation is investigating a variety of hedge and structural options to lessen the BUL product’s vulnerability to market fluctuations.
Market downturns aren’t permanent, and if the company is responsive to market changes, it stands a good chance of profiting handsomely when market conditions improve. Being that the stock price has been severely discounted already, this is a good buying opportunity.
Dividends And Share Repurchases
Lincoln National pays a good dividend per share, which has increased significantly over the last decade. Investors have been well rewarded, with the dividend per share increasing at an average annual rate of 9.2% over the last five years, and the dividend rate is now $1.8 per share, representing a dividend yield of 5.3%.
When we look at the shareholder return, we can see that Lincoln National pays out dividends in addition to share repurchases. Share repurchases are a tax-efficient way for the company to increase its dividend per share while maintaining its dividend distribution as the number of shares outstanding decreases over time.
Dividend distribution has increased from $262 million in 2017 to $319 million in 2021 (a 4% annual growth rate on average). Lincoln National repurchased a large number of shares, totaling $1.1 billion in 2021, with a high buyback yield of 9.2%.
The company reported disappointing third-quarter 2023 earnings and announced that the share repurchase program will be suspended this year. Jefferies believes stock buybacks will not resume in 2024 and has downgraded the stock.
I believe it is speculative to assume that stock buybacks will not resume in 2024, but suspended buybacks will have a negative impact on dividend per share growth. Nonetheless, many analysts expect the dividend per share to rise to $1.88 in 2023 (a 4.4% increase) and $1.98 in 2024 (a 5.3% increase).
Over the long term, shares outstanding have decreased 4.6% annually on average over the last ten years, indicating that management has done an excellent job of increasing shareholder value.
The Stock Is Valued Favorably
Because third-quarter earnings were disappointing, I turned to the price-to-sales ratio to get a sense of the stock’s valuation. The price to sales ratio provides me with useful information about the stock’s current and historical valuation. The current price to sales ratio is 0.3, while the three-year average is nearly double at 0.55. The graph shows that the stock’s valuation is extremely favorable in comparison to historical figures, with the price to sales ratio hovering around 1.
Lincoln National Corporation had a difficult quarter due to declining equity markets and losses from operations in its Life Insurance business segment due to altered assumptions regarding policyholder behavior, resulting in a $2.2 billion net adverse notable item. Other business segments experienced growth in operational income, and higher interest rates resulted in a rise in investment income from its investment portfolio. Lincoln National Corporation is responding quickly to shifting market conditions and is well on its way to reduce market volatility exposure and implementing cost-cutting strategies. Since the Great Recession, the stock has been at an almost all-time low price-to-sales ratio. And, while markets do not decline indefinitely, the Lincoln National Corporation stock price appears to be a perfect buying opportunity.