Lincoln National: Priced at a Huge Discount to Fair Value

·4 min read

After a 50% drop in 2022, the current year has not started off very well for Lincoln National Corp. (NYSE:LNC) with the stock down another 31.60% since January.

Lincoln National: Priced at a Huge Discount to Fair Value
Lincoln National: Priced at a Huge Discount to Fair Value

March's banking crisis should not adversely impact its business long term. With last year's one-time charges behind it and a forward price multiple of just two times earnings combined with a hefty 8.7% dividend yield, Lincoln National has no business being priced down at these levels. It is only a matter of time before the value readjusts higher.

A company rooted in ideals

Commonly known as Lincoln Financial Group, the company was founded in 1905 in Fort Wayne, Indiana. It is currently number 187 on the Fortune 500 list. Named after the 16th President of the United States, Abraham Lincoln, the company notes on its website it is guided by his character and ideals as it "strives to build a better world with greater financial security and opportunity for all." It operates multiple insurance and investment management businesses. Its diversified model allows it to generate revenue through multiple channels, mitigating risks associated with any single source of income.

Lincoln National: Priced at a Huge Discount to Fair Value
Lincoln National: Priced at a Huge Discount to Fair Value

In addition to offering a range of insurance products, including life insurance, annuities, long-term care insurance and other related products, the company provides investment management services through its subsidiaries, such as Lincoln Financial Advisors and Sagemark Consulting. It also has group insurance options for employers, which include disability insurance, dental insurance and other employee benefit programs, along with retirement plan services.

Lincoln National also earns income from various other sources, such as the sale of real estate and other investments. Additionally, the company generates revenue through its other subsidiaries that offer financial services.

Solid financials

Other than a $2.2 billion loss in 2022, primarily from universal life insurance lapse assumptions, the company is in good health.

We took swift action during the fourth quarter to fortify our balance sheet and improve our capital generation as we remain focused on positioning our franchise for profitable, capital-efficient growth by leveraging our differentiated business model, powerful distribution capabilities, and our high-quality investment portfolio, President and CEO Ellen Cooper said during the companys quarterly call last month.

At the end of 2022, Lincoln National had cash and equivalents amounting to approximately $3.3 billion, in addition to a $2.5 billion revolving credit facility that matures in June 2026. The company has the ability to issue significant amounts of debt, equity securities and other instruments, if necessary. Further, Lincoln National is well positioned for growth from 2026 to 2028 in markets such as retirement plans and annuities, which have high potential demand and a current customer base of around 16 million.

Lincoln National is expected to return to profitability in 2023 with a significant boost to its bottom line - anticipated earnings of approximately $8.15 per share. With its stock currently trading at $20 a share and considerable financial strength, a 9 times earninngs multiple (sector median) would place the stock price in the $70 range. Book value is also supposed to rebound sharply in the next couple of years, rising back to 2019 levels by the end of 2025. If Lincoln National was readjusted to the sector median on this number, the price could reach $100 a share.

Get paid to wait for prices to rise

Dividend distribution has increased from $262 million in 2017 to $319 million in 2021, reflecting an average annual growth rate of 4%. In fact, Lincoln National has grown its dividends for 12 consecutive years. Furthermore, the company has paid them out for 33 straight years. More importantly, Lincoln National has proactively reduced its share count, carrying out significant repurchases in 2021 amounting to $1.1 billion. In fact, since 2013, the company has bought back nearly 100 million shares, pushing the total outstanding down to 169 million, and further boosting earnings per share. Its market capitalization is $3.5 billion right now despite having $6.5 billion in cash and generating $18 billion in revenue.

After its earnings in mid-February, Lincoln National announced a dividend of 45 cents payable May 1 with an April 7 ex-dividend date. It is perfectly plausible that this would continue in the face of even further decline in share prices, mainly because the company has been unfairly impacted by this current banking crisis, more so than it should have been. If the dividend is not suspended and these payments last through 2023, shareholders will receive north or 9%, almost three times the yield from 2021.

The bottom line

Lincoln Nationals brand name, distribution platform and capital available for acquisitions, supported by a strong balance sheet, make it a strong business. If you liked it at $31 a share when the year started, you should love it at $20. Life insurance is not banking and the one-time $11.62 per-share charge has driven the stock down. The company does deserve a lower valuation, but not this much lower.

This article first appeared on GuruFocus.