Dividend Growth Powers Lincoln’s Value

Dividend Growth Powers Lincoln’s Value

Price $59.43                          Core Holding                        June 18, 2021

  • Increased dividends for 11 straight years.
  • 12.7% 5-year dividend growth rate.
  • Best-in-class balance sheet fundamentals.
  • Cost-saving measures have netted $100 million in savings during the COVID-19 pandemic, expected to remain.
  • Industry-leading digitization initiatives to increase customer satisfaction and outcomes.
  • Compelling (low) valuation for a steady dividend grower.

Investment Thesis

Lincoln Financial Group (LNC) leads the industry in balance sheet strength and steady growth in dividends. Its inexpensive valuation helps investors in two ways: investors get more yield for each dollar invested and LNC can accretively repurchase its shares thus driving the value of the remaining shares higher. LNC is steady dividend growth at a great stock price.

What is Lincoln?

Lincoln provides annuities, retirement services, and life insurance to more than 17 million customers. While its products are traditional, its strategy is innovative and has driven high dividend and fundamental growth in the last 5 years. The primary goals of Lincoln are offering fantastic digital reach for better customer outcomes and ease of use, and decreasing costs across the board. Lincoln was able to weather COVID-19 well and delivered solid financial results despite increased mortality claims and decreased sales. This Fortune 250 company has provided a variety of financial services for over 150 years.

Lincoln annuities are fairly traditional, allowing account holders to insulate their savings from adverse market moves or participate in market growth. It has 3 primary versions of this product, fixed percentage payout, and indexed to the market payout, or variable customization. These annuity plans can be added to various retirement plans or purchased separately.

Lincoln similarly provides standard life insurance products. Term life insurance, survivorship insurance, variable universal, and indexed to the market life insurance. There are many customization options within the life insurance category, allowing the policyholder many choices on how to provide for the beneficiaries.

Lincoln offers various retirement planning services, such as defined benefit and defined contribution plans. Lincoln plans are quite customizable by employees or employers, who can add various products and services on top of their plans.Most of these services can be bought in a group package, for unions or employees, in addition to the ability of employers to add Lincoln services to their marketplace. Employee purchased group services make up approximately 67% of group revenue.

Lincoln Investor Deck 2021

“Reprice, Shift, Add New”

Lincoln’s products are standard, but their strategy is innovative. Lincoln frequently adds new products to appeal to new markets, while also scaling and repricing older products to respond to market conditions and customer demand. Lincoln has been innovating during the pandemic, introducing eight new products so far in FY2021 and repricing many others. These products increase customer choice and provide better participation in newer market segments. Repricing allows for them to shift product mixes, based on consumer demand.

Two shift initiatives enacted are to reduce their costs and increase digitization of their services.

Their digitization initiative is to improve the customer experience and ease the process for customers to see their accounts and purchase new products. This has the benefit of allowing Lincoln to pivot quickly, and to offer new products to emerging sectors of the market. An additional benefit is that shifting to digitization removes many costs associated with the traditional sales model, such as sales staff. Their cost reduction was initiated in response to the COVID-19 pandemic so that the company would be braced for downturns. They intend to make this program permanent, as they have saved $100 million in savings throughout 2020. Once mortality rates return to normal, we expect these measures to contribute to an increased bottom line.

Risk

LNC is a financial company, that opens them up to traditional financial risk experienced by financial firms. This includes interest rate risk, the effect of adverse market moves on their holdings, and regulatory risks.

Being an insurance company, LNC pays out based on the age and mortality rate of their customers. COVID-19 was a nightmare scenario for them, and they weathered it well. 

Metrics

Lincoln had planned $600 million in stock buybacks and dividends during 2020, which allowed them to increase their dividend rate for the 11th consecutive year. During Q2 and Q3 2020, they paused buybacks so that they could focus on cutting costs without hurting dividend payouts. Despite this pause, they have already repurchased 46% of their shares previously outstanding. 

Investor Presentation 2021

Annuities had an increase of 11% in revenue over the previous quarter, with the average account value reaching a 16% growth from the previous quarter. Retirement plans had a fantastic year despite the pandemic. Strong growth in portfolios drove a 43% increase in income. Life insurance was below the other products, only growing at about 8%.

Estimated Price-to-Earnings

Current Price

Price-to-Book

E2021

E2022

E2023

Lincoln National Corp

$62.41

0.609

7.0

5.8

5.4

 

What is similar across all products, is that many people have been prioritizing short-term savings during the pandemic employment loss. On average, deposits for all retirement products were down 14.5%. Most of this was offset by the growth seen in their portfolios and increases in premiums. We expected Lincoln’s price-to-earnings decrease as they recover from the pandemic, and as their cost savings measures come into their own.