On Oct 13, we issued an updated research report on Lincoln National Corp. (LNC). While the company’s capital position remains secure owing to improving cash flows, the present low interest rate environment and intense competition may continue to limit growth in annuities and net flows.
Notably, this Zacks Rank #3 (Hold) stock has kept the earnings streak alive in the trailing four quarters with an average beat of 7.4%. The company’s second-quarter 2014 earnings of $1.47 a share also outshone the Zacks Consensus Estimate by 7.3% and exceeded the year-ago quarter figure by 15.7%.
Moreover, Lincoln National’s decent liquidity, buffer capital and improved financial leverage aid incremental capital deployment and score well with the ratings agencies. The company is poised to grow from extended distribution relationships, healthy restructuring and a diversified product portfolio. The amended reinsurance treaty in Jul 2014 should further mitigate risks and improve cash flows. The factors have also enabled Lincoln National to drive return on equity (ROE), book value per share, free cash flows and deploy excess capital efficiently.
However, stiff competition is putting significant risk on the company’s market share through product pricing and new product offerings. Additionally, it raises modest risk on client retention and net flows, which plunged 34.5% year over year in the first half of 2014. Net flows are expected to remain weak in 2014, given the fluctuations in timing of larger plans as well as in interest rate spreads. Another key measure of profitability, total deposits, also posed sluggishness in first-half 2014, amid higher expenses, thereby compressing margins as well.
Overall, a balanced risk-reward profile for the near term has led to minor upward estimate revisions for 2014 and 2015. The Zacks Consensus Estimate rose 2 cents each for both 2014 and 2015 to $5.66 and $6.08 per share, respectively, in the last 60 days.
Moreover, the Most Accurate estimate for Lincoln National’s 2014 and 2015 earnings currently stand at $5.70 and $6.11 a share, resulting in an Earnings ESP of +0.5% and +0.2%, respectively. Even on a year-over-year basis, EPS is expected to escalate by about 12.8% in 2014 and 7.5% in 2015.
Key Picks in the Sector
Investors interested in the life insurance sector could consider better-ranked stocks like Symetra Financial Corp. (SYA), Sun Life Financial Inc. (SLF) and China Life Insurance Co. Ltd. (LFC). All of these stocks carry a Zacks Rank #2 (Buy).
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