EQH - Equitable Holdings: Undervalued Against Sector Averages With A Great Dividend

2023-08-20 02:45:56 ET

Summary

• Equitable Holdings achieved record net inflows of $1.4 billion in the Retirement segment, indicating strong demand and positive market outlook.
• The company's diversified financial services and solid fundamentals, including a high cash flow margin and strong dividend growth, make it an attractive investment.
• EQH's focus on high-value assets and plans for growth in asset management position it for rapid growth in the coming years.

Introduction

Operating in the diversified financial services industry, Equitable Holdings, Inc. ( EQH ) has done very well for itself as it achieved record net inflows of $1.4 billion in the Retirement segment of the business. The company doesn't get a lot of coverage here on Seeking Alpha which is a shame seeing as the business fundamentals are very solid and it ultimately means I am rating them a buy.

The share price saw a quite harsh decline in the earlier part of this year, falling below $23 per share. The recovery though has been very good but it doesn't mean the company is overvalued by any stretch in my opinion. The p/e sits at just under 6 and with a strong dividend growth rate over the last few years I think investors have a lot to gain from starting a position in the company. Rating EQH a buy.

Company Structure

EQH is included in the diversified financial services industry where it has grown impressively in the last few years. The financial services it offers are diversified and have been a big reason for the company's growth. The EPS for example has been growing at a yearly rate of 15% over the last 5 years. That is quite impressive but it hasn't translated into the share price growing as much.

The operations span worldwide and the business is divided into four various segments right now, these are as follows: Individual Retirement, Group Retirement, Investment Management, Research, and lastly Protection Solutions. Within the first segment, the services and offerings include variable and annuity products that are mostly aimed and high net worth individuals. This segment has been growing very well over the last 12 months and sits at an account value of $83.9 million, up from $71.8 million a year prior. The growth was primarily attributed to the market performance and the net inflows the company received as well.

As for shareholders in EQH they have always had a high priority as the management continues to ensure the payout ratio is high and satisfactory. With an aim at growing EPS by 12 - 15% up until 2027 at least, it seems likely we will see more quarterly dividend increases in the coming several years. The cash generation expected up until 2027 is $2 billion and is setting up EQH to be able to scale up the business if they so wish very well and drive a higher ROE and ROA too.

Going forward the priority continues to be on ensuring they have a high-value asset base that they can tap into and leverage into higher earnings growth. As for the company's goals in its segment build-up, the largest difference between now and 2027 is that asset management is set to make up a bigger portion at 20%. In terms of retirement, it sits quite similar to where we are right now. The results of these shifts are yet to be realized, but I think the progress and results so far speak for EQH being well on its way to growing quickly in the coming years.

Fundamentals

Looking at the fundamentals of EQH I think they remain very solid. Looking at the asset growth of the company we continue to see strong additions of inflows across various segments of the business. The company recorded net inflow records for the Retirement segment and also for the Wealth Management segment which hints at stronger demand and a more positive look on the market by both customers and clients.

EQH is a cash flow machine with a margin nearing 60% which is a major reason for the solid dividend growth the company can do. Looking at the ROE it remains very solid too at over 38% TTM. The payout ratio sits at under 20% and in 2022 accounted for $294 million, but a far higher amount of capital was returned to shareholders through buybacks. In 2022 alone EQH spent $849 million in buybacks to drive shareholder growth and returns. With the market cap at under $10 billion that is a fantastic amount of shares being repurchased and it's almost solely generating a market-beating yearly return for shareholders.

Earnings Transcript

From the last earnings call, there are some comments that I want to include to further highlight the performance of the company and why I think they continue to be a solid addition for investors. The CEO Mark Pearson said the following.

• "Collectively, our businesses have delivered approximately $900 million of cash generation to holding here to-date, including a $600 million dividend from our insurance entity in July".

• "Given this progress, we are confident in our ability to achieve our 2023 cash generation guidance of $1.3 billion. Our capital ratio has remained resilient, with a combined insurance Company RBC ratio of approximately 425% to 450% as of quarter-end".

Being well on track to achieving these goals I think the likelihood of dividend growth is high and with solid fundamentals, EQH is proving why it's such a great addition right now to a portfolio. Some short-term headwinds with outflows in the asset management segment aren't sufficient to make EQH anything other than a buy. With the company aggressively buying back shares too I think we are getting a good deal.

Risk Associated

Investors should approach EQH with a prudent perspective, taking into account a notable aspect of caution regarding the company's leverage. The company has over the years moved towards having lower leverage to justify a better asset quality and incentives investors into the business. This trend towards reduced leverage reflects the company's proactive efforts in mitigating this risk. With lower financial risks EQH looks more and like a decent opportunity for investors and individuals wishing to use their services.

While the improved leverage metrics signal a positive trajectory, investors must remain vigilant about the potential implications of leverage on EQH's financial health. High leverage can amplify the impact of economic downturns and market volatility, potentially leading to heightened vulnerability during adverse conditions.

Investor Takeaway

With a good discount to the sector based on earnings and an impressive target that EQH is well on its way to achieving by 2027, I think the buy case here is very appealing. The asset base is sound and ROE has been climbing to a very high level, beating out the sector. In terms of investor returns here I think they are fantastic if EQH gets a valuation of 8 - 9 based on earnings, which would be in line with the sector. This could be achieved by stronger net inflows, but in any case, the company offers little risk and is a buy for me.

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