Lincoln Logs Gains Despite Low Rates

12/22/2014


  Recent Price
$56
  Dividend
$0.80
  Yield
1.4%
  P/E Ratio
10
  Shares (millions)
267
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$58.48 - $45.25

Lincoln National ($56; LNC) sells annuities, life insurance for individuals or groups, and retirement-planning services. It stands to benefit from rising interest rates and continued demand from retiring baby boomers for investment products that offer a steady stream of income.

The company enjoys strong trends for operating momentum and profit estimates. In the first nine months of 2014, Lincoln's sales rose 12% and operating cash flow more than doubled. Gross profit margins expanded and are on pace to reach their highest annual level since 2007. Even better, Lincoln shares are cheap, earning a Quadrix Value score of 87.

The stock looks attractive relative to other S&P 1500 life and health insurers. At nine times estimated year-ahead earnings, the stock trades 18% below its industry average. Yet Lincoln's per-share profits are expected to rise 6% in the coming year, ahead of the 3% average for its peer group.

With a Quadrix Overall rank of 98 and both sector-specific scores exceeding 90, the stock is a Long-Term Buy.

Business breakdown

Lincoln has exposure to interest rates and swings in the stock market, requiring the company to maintain a larger capital cushion than many insurers. An environment of prolonged low interest rates would pressure Lincoln's profit margins, but current capital levels seem sufficient to absorb these risks. Lincoln says stress tests indicate its business can withstand interest rates holding at 2% for 10-year loans over the next 40 years.

Reinsurers will play less of a role in Lincoln's business going forward. By keeping more of its mortality business in-house, Lincoln hopes to boost the life-insurance unit's earnings contribution to about 33% from its current 21%.

Management hopes this move will reduce future profits' correlation with the stock market, though they could also become lumpier and more volatile. In addition, the life-insurance business is somewhat weak now, with several peers taking charges in recent months.

Dividends and buybacks

Lincoln paid a quarterly dividend of $0.415 per share as recently as October 2008. Today, it continues to rebuild a dividend that shriveled during the financial crisis. In October, Lincoln raised its quarterly distribution 25% to $0.20 per share, payable Feb. 1. Lincoln returns just 14% of trailing earnings through the dividend — a fairly conservative rate, considering its industry average is 20%.

After reducing its sensitivity to the stock market, Lincoln may feel more comfortable boosting the payout ratio. For most of the five years prior to 2008, Lincoln's payout ratio exceeded 30%, typically above its industry average.

More than $2 billion in stock buybacks have lowered outstanding shares by 18% in the past four years, with Lincoln paying an average of $29 per share. Lincoln agreed to sell its media business for $105 million earlier this month and may use those proceeds to fund more repurchases.

Investors can obtain an annual report for Lincoln National Corp. at 150 N. Radnor Chester Road, Radnor, PA 19087; (484) 583-1400; www.lfg.com.

LINCOLN NATIONAL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '14
1.56
vs.
1.34
13%
56.52
-
50.08
10 - 9
Jun '14
1.47
vs.
1.27
9%
53.09
-
45.61
10 - 9
Mar '14
1.34
vs.
1.02
12%
53.26
-
45.71
11 - 9
Dec '13
1.40
vs.
1.10
5%
52.27
-
40.84
11 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
11.88
5.03
0.48
52.27
-
26.69
10 - 5
2012
11.41
4.47
0.32
27.54
-
19.04
6 - 4
2011
10.55
4.17
0.20
32.68
-
13.75
8 - 3
2010
10.31
3.13
0.08
33.55
-
20.65
11 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
87
87
75
58
97
70

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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