Lincoln National Stock: A no-brainer buy (NYSE: LNC)
There are a number of financial stocks that remain attractively priced, particularly after the market fell in the latter part of this week. This includes Lincoln National Corp. (NYSE: LNC), which, as seen below, has been limited since the middle of June and is trading well below its 52-week high of $77.57. In this article, I highlight what makes this a good opportunity to layer on top of that quality dividend name, so let’s get started.
Lincoln National Corporation is a provider of retirement, insurance and wealth protection solutions that helps clients achieve their lifestyle, savings and income goals, and protect against long-term care expenses duration. It is headquartered in Pennsylvania and was founded over a century ago, in 1905. Currently, it serves 16 million customers and has a total account value of $279 billion. In the past 12 months, it generated $19.6 billion in total revenue.
LNC participates in the fast-growing US markets for annuities, life insurance and workplace solutions, including benefits and pension services. It also maintains a strong A-rated balance sheet with a statutory surplus of $9.6 billion and an RBC (risk-based capital) ratio of 400%.
Like most insurance companies, LNC invests its insurance funds (premiums not yet paid to claimants) seeking a safe and sound return, and management follows a sound investment strategy. This is reflected in the fact that 97% of LNC’s investments are rated Investment Grade and that no sector represents more than 14% of the portfolio.
As shown below, the investment portfolio is well diversified, with financials, mortgages, non-cyclicals, structured investments and utilities accounting for 62% of the portfolio’s value.
LNC reported strong results, with pension services reporting positive net inflows of $913 million in the second quarter, up $517 million from the prior year period. Additionally, life insurance sales increased 53% year-over-year to $193 million, and group protection insurance premiums increased 7% year-over-year to $1.2 billion. .
Also encouraging, book value per share excluding AOCI is up 5.3% year-over-year to $79.49. For reference, AOCI refers to accumulated other comprehensive income which includes unrealized gains and losses reported in the equity section of the balance sheet. As such, non-AOCI book value is a more meaningful metric, especially during periods of market volatility like what we saw in the second quarter of this year. Additionally, LNC is becoming a more efficient business, as its expense ratio landed at 12.5%, down 50 basis points from the second quarter of last year.
Notably, adjusted operating income was $2.23 during the second quarter, down from $3.17 in the year-ago period. I’m not overly worried, however, as this was primarily due to one-time expenses, declining income from alternative investments and stock market volatility, not structural issues within the company itself. It also looks like the market took the results head on, with the stock price fully recovering from its August 5 drop (the day after the earnings release), before falling a little with the market in course of the last two days.
Looking forward, LNC is targeting continued cost savings in the $260-300 million annual run rate range through its Spark initiative, and management is targeting an EPS CAGR of 8-10% over the next few months. years. This could be achieved through a combination of underlying business growth and aggressive stock buybacks.
Over the past 12 months, LNC has repurchased an impressive 10% of its shares. As shown below, LNC has reduced its share count by 39% over the past 10 years.
Meanwhile, LNC pays a well-hedged dividend yield of 3.6% with a low payout ratio of 25%. The dividend also has a CAGR of 9.6% over 5 years and 11 consecutive years of growth.
I see value in the action at the current price of $49.47 with a forward PE of just 5.8, well below its normal PE of 9.0 over the past decade. Analysts on the sell side have an average price target of $59.36, which translates to a potential total return of 24% over one year, including dividends.
Key takeaway for investors
In summary, I think LNC is a high quality insurance company with an attractive valuation at the current price. It has strong growth prospects, a well-hedged dividend yield and a history of share buybacks. The current depressed share price, coupled with a respectable dividend yield, makes LNC a solid buy for income and growth investors.