Lincoln National Corporation (LNC)

Transcription

1 20th November 2016 Lincoln National Corporation (LNC) EQUITY RESEARCH ANALYSIS MICHAEL A. BALL

2 VALUE $ Week Price Range Market Capitalization Annual Dividend Yield Annual Dividend Rate Industry $ $62.62 $14.23 Billions 1.90% $1.16 Insurance Upgrades & Downgrades History Date Research Firm Action From To 9 Nov 2016 FBR & Co. Downgrade Outperform Mkt Perform 7 Oct 2016 Credit Suisse Initiated Neutral 15 Jul 2016 Goldman Downgrade Buy Neutral 29 Jun 2016 BofA/Merrill Downgrade Buy Neutral 14 Apr 2016 Macquarie Downgrade Outperform Neutral 22 Jan 2016 Raymond James Upgrade Outperform Strong Buy 13 Jan 2016 Wells Fargo Downgrade Outperform Market Perform 29 Sep 2015 Piper Jaffray Upgrade Neutral Overweight 10 Sep 2015 Goldman Upgrade Neutral Buy 27 Aug 2015 Sandler O'Neill Initiated Buy Brief company overview: Lincoln National ( LNC ) is a holding company. The company operates multiple insurance and retirement businesses through its subsidiary companies. Through its business segments, the company sells a range of wealth protection, accumulation and retirement income products and solutions. These products include fixed and indexed annuities, variable annuities, universal life insurance (UL), variable universal life insurance, linked-benefit UL, term life insurance, indexed universal life insurance, employer-sponsored retirement plans and services, and group life, disability and dental. The company provides products and services through its Annuities, Retirement Plan Services, Life Insurance and Group Protection segments.

3 Earnings & Valuation Analysis: On November 2, 2016 Lincoln Financial Group ( LNC ) reported net income for the third quarter of 2016 of $467 million, or $2.00 per diluted share available to common stockholders, most of the gains in the EPS Q3 came from share buybacks. Shares Outstanding Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Average for the period diluted Revenues from insurance fees has gained steadily, while other revenues have not showed as much growth.

4 A breakdown of Total revenue growth from 2012 Q3 to 2016 Q3 has been Insurance premiums, 16.83% Insurance fees, 38.99% Net Investment Income, 9.86% Net investment income 38% Revenues Q Insurance premiums 21% Insurance fees 41% Insurance premiums Insurance fees Net investment income Figure 1 Q3 Revenues The share price from Q has gained over 100% (before the post-election boost) while total net income is up just 9.11%. Total expenses on the other hand is up 14.87% from the 2012 Q3. At current valuations and with the forecast for 2017fy added Multiple Targets Q3-16 Now Q4 W Est 2017eFY 8 Value Buy Buy Target Overvalue Now let s assume no shares got repurchased since 2012 and look at the difference in the valuation model. Multiple Targets Q3 fair value without buybacks 8.00 Value Buy Buy Target Overvalue 51.75

5 As you can see by the historical P/E ratio the market thinks a fair value for ( LNC ) is just above 8X and typically over valued at 12X. Based on the 2017fy EPS estimate of 6.91 that gives a forward P/E of 9X, if you were to buy the stock the price of $62 you have potently $14 upside (22.59%) assuming earnings are in line with the consensus 2017 estimates. Paying out around $1.16 per share (according to yahoo finance) in dividend that gives you 1.89% yield at the current price of (chart shows TTM data)

6 As you can see EPS has signifyingly benefited from the share buyback program over the last few quarters Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Average for the period diluted Basic Diluted The average tax rate from 2012 is 20% 30.00% Tax Rate 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

7 Brief Industry Analysis: On an industry forward P/E the rebate of the Credit Suisse Life Index versus the S&P 500 is 44% versus the normal rebate of 36%. Macro headwinds are dampening growth for the life insurance industry according to Dennis R. Glass ( LNC ) CEO who said recently. We are certainly not immune to that. However, I am pleased that across the enterprise, we are successfully responding to these challenges with short-term actions, including disciplined expense management and incremental capital management to sustain our EPS growth.. As of now, (AEL), (LNC), (MET), (PRU), and (VOYA) are all exchanging at rebates more noteworthy than half, which appears to be extreme at first glance. We also have additional actions underway to position us for the longer term, including pricing changes on both in-force and where-needed new business and enterprise-wide digitization initiative that will significantly enhance our customer experience and provide efficiencies over time and an intense focus on product innovation, particularly in our Annuity business, to meet evolving consumer preferences and marketplace shifts. This strategy will once again rely on our core strengths, distribution and product development.

8 Key Risks: 1) lower equity 2) The department of labour fiduciary rule could have a negative impact on sales, pressure on earnings could be lifted by increased share repurchases (as we have highlighted) 3) Continued low interest rates could result in DAC/reserve charges Conclusion: Current share price is not at a level what would offer too much upside, buying more at the suggested level of around $47-50 would be more suited, Lincoln Financial Corp is one of the most interest rate affected stocks, continued low rates could hurt the income in the future but could be off set slightly by the new Trump Tax of 15% plus continued share repurchases. My valuation assigns an average value P/E multiple of 8X, the Buy price target of $47 represents 8x my 2017E EPS of $6.91. Downside scenario $38.5 given EPS of 7 and low P/E of 5.5 Worst case scenario assumed at $18.98 or about 5.5x of a 50% reduction in EPS

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