AEG - Aegon: 2025 Targets Remain On Track

2023-11-03 12:00:41 ET

Summary

• Aegon has undergone a transformation, including liquidating its Dutch operations and expanding in the TransAmerican market.
• The company has set financial targets for 2025, including leverage of EUR 5 billion and an annual dividend of EUR 0.40 per share.
• Aegon's first-half results show progress towards meeting these targets, with operating profit rising and strong earnings growth expected.

Aegon Overview

We wrote about Aegon Ltd. ( AEG ) back in December 2019 (shares were trading at $4.43 per share) when we were moderately bullish on the stock for several reasons. Encouraging technicals, an above-average dividend , and robust forward-looking earnings expectations at the time were the main reasons why we believed strong hands would eventually step in to buy the stock. The one signal we were looking for however to finally pull the trigger on the long-side was a crossover of the monthly MACD technical indicator. This indicator is particularly prevalent on longer-term charts due to it being able to decipher changes in both momentum and trend over a long period. Suffice it to say, that a long-term buy signal didn't present itself until late 2020 due to the sharp drop in the share price (close to the $2 level) as a result of the pandemic bringing everything to a grinding halt.

Timing an entry into a stock such as AEG is crucial irrespective of how cheap the company may appear at any point in time. The reason is that long-term gains (capital appreciation) have not been fruitful in this play as we see from the long-term chart below when compared to the S&P500 for example. Therefore, despite the stock's almost 6% dividend yield (which should have aided AEG's negative 10-year return meaningfully), income-orientated investors need to think of a stock's 'total return potential' instead of the dividend yield that is presented at the time.

Fundamental Priorities

Management's belief that Aegon has far more potential currently (compared to its pre-pandemic state) may have validity when we see the company's mission to transform itself. Firstly, the recent decision to liquidate its Dutch operations by selling to ASR in asset management, insurance, and pensions will undoubtedly accelerate the transformation process Aegon has been undergoing. Then you have the Redomiciliation to Bermuda this year exemplifying Aegon's clear intent to grow share significantly in the TransAmerican market. The real crux though of how Aegon has been transforming lies in how capital continues to be aggressively relocated from financial assets to strategic assets. The CEO's succinct comments on the recent Q2 earnings call reflect Aegon's aggressiveness to same as we see below.

On the strategy front, we continue to take steps to transform our business. We have increased our financial stake in our Brazilian joint venture, expanded our partnership with Nationwide Building Society in the U.K., and extended our asset management partnership with La Banque Postale in France. The sale of our remaining Central and Eastern European businesses has been closed, and we have announced the sale of our stake in our joint venture in India. We are now fully focused on 3 core markets, 3 growth markets, and 1 global asset manager.

We're also delivering on our commitments to continue to reduce our exposure to U.S. Financial Assets and to improve the level and predictability of capital generation. Transamerica has been able to execute an additional reinsurance transaction, encompassing 14,000 Universal Life policies with secondary guarantees. This will free up approximately $225 million of capital, which will be used for management actions to further reduce our exposure to Financial Assets over time. It also significantly improves our risk profile, together with the prior similar reinsurance transaction, a total of 25% of the statutory reserves backing these policies have now been reinsured.

2025 Targets Look On Course

Furthermore, management has put 'meat on the bones' concerning its ongoing transformation by going public with its 2025 financial targets. These targets comprise leverage of EUR 5 billion, free cash flow of EUR 800 million, an annual dividend of EUR 0.40 per share and operating results of EUR 1.2 billion. Suffice it to say, I believe dividend investors do not need to worry if capital appreciation will accompany the dividend over the next few years because it certainly will if Aegon can meet these targets.

Moreover, the company's first-half results (announced in August) gave the market a line of sight to meet the above 2025 targets. Operating profit (an area where AEG has traditionally struggled) rose by 3% over the first half to hit EUR 818 million and although free cash flow of EUR 287 million (EUR 574 million annualized) remains well below the EUR 800 million target, strong earnings growth next year (where revisions have been strong over the past 3 months or so) demonstrate that free-cash-flow should increase as a result. Remember, AEG's trailing cash-flow multiple already trails the sector at 3.56 (sector average of 6.4) so we see a move here in the share-price to at least the $5.50 mark (overhead resistance - see below) which would give the stock a 10%+ upside from its present level.

Conclusion

To sum up, given Aegon's low cash dividend payout ratio of approximately 20%, low valuation , and encouraging forward-looking growth profile, we see shares undervalued at present. From a growth perspective, the company's first-half numbers gave confidence that the 2025 earmarked targets are indeed achievable. We look forward to continued coverage.

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