On Jan 14, we issued an updated research report on Lincoln National Corp. (LNC). The company holds a secure capital position, fair liquidity and improved financial leverage that aid incremental capital deployment, reflected by a 25% dividend hike in Oct 2014 and share repurchases worth $450 million in the first nine months of 2014.
However, the persistent low interest rate environment has weakened investment yields. The ongoing market volatility and pricing pressure have also affected variable annuities adversely, reducing its sales by 8.9% year over year in the first nine months of 2014.
Even net flows plunged 34.1% in the first nine months of 2014 and are expected to remain weak in 2014, given the fluctuations in timing of larger plans as well as in interest rate spreads. Amid the challenging market scenario, an above-average competitive risk and higher expenses are not expected to improve much in the near future.
Nevertheless, Lincoln National’s capital remains secure, supported by strong operating cash flows that surged to $1.1 billion in the first nine months 2014 against $504 million in the year-ago period. The company has also progressed substantially in implementing long-term solutions for reserve financing that aligns asset-liability duration more closely, thereby reducing refinancing risks. These efforts have helped debt reduction and subsequently improved the financial leverage.
Additionally, an improved business profile has fueled the growth of client distribution network, policies-in-force, insurance premiums and account balances. These revenue drivers will continue to boost the top line, margins and drive return on earnings. Going forward, the pending divestment of Lincoln Financial Media (LFM) will add flexibility to Lincoln National’s capital and cash flow, and help focus on its core life and retirement insurance operations.
Earnings Review
Notably, this Zacks Rank #2 (Buy) stock has kept the earnings streak alive in the trailing four quarters with an average beat of 7.6%. The company’s third-quarter 2014 earnings of $1.56 a share also outshone the Zacks Consensus Estimate by 9.9% and exceeded the year-ago quarter figure by 16.4%.
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 0.5% and 1% in 2014 and 2015 to $5.84 and $6.25 per share, respectively, in the last 60 days.
Moreover, the Most Accurate estimate for Lincoln National’s 2015 earnings currently stands at $6.28 a share, resulting in an Earnings ESP of +0.5%. Even on a year-over-year basis, EPS is expected to escalate by about 16.1% in 2014 and 7% in 2015.
Key Picks in the Sector
Investors interested in the life insurance sector could consider other favorably-ranked stocks like Protective Financial Corp. (PL), Voya Financial Inc. (VOYA) and Primerica Inc. (PRI). All of these stocks carry the same Zacks Rank as Lincoln National.
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