Analysts' Choice: Don't Let Lincoln's Growth Bore You

12/28/2015


  Recent Price
$51
  Dividend
$1.00
  Yield
2.0%
  P/E Ratio
8
  Shares (millions)
253
  Long-Term Debt As % Of Capital
28%
  52-Week Price Range
$62.08 - $45.56

In an industry awash with mortality tables and actuarial assumptions, insurers often feel compelled to invent colorful characters — such as cavemen, ducks, geckos, and Flo — to market their unglamorous products.

But for investors, there's nothing bland about a company trading at eight times trailing earnings, expanding its dividend, and positioned to grow per-share profits by double-digits in the coming year. Meet Lincoln National ($51; LNC), a property-and-casualty insurer rated Long-Term Buy.

Poised to spring from rate thaw

Sales have advanced in 14 straight quarters, including 5% growth in the nine months ended September. Insurance premiums rose 7% so far this year, while fee income jumped 14%.

Lincoln's two largest segments drive most of the growth. Life insurance (45% of operating revenue, 22% of operating income) managed sales gains of 11% in the first nine months of 2015, though profitability declined because of unusually high mortality rates and management resetting its actuarial assumptions. Annuities (30%, 66%) posted 9% higher revenue so far this year. Group protection (17%, 3%) and retirement-planning services (8%, 9%) round out Lincoln's businesses.

Despite the steady revenue growth, gross profit margin has declined in each of the last four quarters. Years of abnormally low interest rates forced Lincoln to reinvest cash generated by its investments in lower-yielding instruments. At the same time, many annuity and insurance products guarantee a certain interest rate. The confluence of these two factors has narrowed Lincoln's interest-rate spread.

The Fed's move in December to begin boosting rates, while likely to help widen that spread, could also present risks. A period of rapidly escalating rates can cause customers to cancel insurance policies and annuities in favor of products with more favorable terms. It could also drive Lincoln to increase the rates its pays out to customers at a faster pace than it can add higher-yielding instruments to its investment portfolio. However, these adverse scenarios seem less likely if the Fed sticks to its plan of gradually boosting rates.

Conclusion

Lincoln has raised its dividend at least 25% in each of the past six years, with the latest hike to take effect in February. Yet the quarterly distribution of $0.25 per share remains well below its pre-financial-crisis level of $0.41 per share. Management has repeatedly said it aims to maintain a "competitive" dividend, and we see plenty of room for growth. The projected year-ahead dividend accounts for just 16% of earnings over the last 12 months, less than half of the average payout ratio for dividend-paying property-and-casualty insurers in the S&P 1500 Index. Lincoln yields 2.0%, also below its industry average of 2.6% for dividend-payers.

Analysts expect Lincoln's profits to rise 19% to $6.54 per share in 2016, versus 15% average growth for the industry. Yet the stock trades at just nine times estimated 2015 earnings, a 33% discount to its industry average.

An annual report for Lincoln National Corp. can be obtained at 150 N. Radnor Chester Road, Suite A305, Radnor, PA 19087; (484) 583-1400, www.lincolnnational.com.

LINCOLN NATIONAL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '15
1.66
vs.
1.51
9%
61.20
-
45.77
10 - 8
Jun '15
1.46
vs.
1.43
3%
62.08
-
55.75
10 - 9
Mar '15
1.35
vs.
1.34
4%
60.84
-
49.83
10 - 8
Dec '14
1.67
vs.
1.40
18%
59.17
-
45.25
10 - 8
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
13.42
5.95
0.64
59.17
-
45.25
10 - 8
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
3.94
0.20
32.68
-
13.75
8 - 3
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
90
54
94
76
64
50
40

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


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