2023-09-12 08:38:10 ET
Summary
- Globe Life has seen steady share price appreciation but is trading at higher levels compared to the rest of the financial sector.
- The company specializes in life and health insurance products, with the life division accounting for 71% of total premium revenue.
- Higher interest rates and debt have impacted the company's earnings, but there are still growth opportunities and potential for dividend increases.
Introduction
Globe Life Inc. ( GL ) is one of the larger providers of insurance in the market and has seen a steady climb in share price appreciation over the last couple of years. In the last 12 months or so it's up by around 14% and with a decent yield of around 1% I think the company looks appealing on a surface level. But when we compare it to the sector, we can quickly see that perhaps we aren't getting such a good price here, actually. Based on earnings, it's trading at double-digit levels above the rest of the financial sector. I think that for GL to be a buy it needs to see a correction down to where the rest of the sector is, or below it. Either way, though, the company has clear qualities about it, and that ultimately makes it a hold for now in my opinion.
Company Structure
GL specializes in offering a diverse range of life and supplemental health insurance products, primarily tailored for lower-middle to middle-income households across the United States. The company's insurance portfolio comprises both life and health insurance divisions, each contributing distinctively to its revenue streams. With a broad exposure to various target groups, the company has been able to expand margins at a steady rate the last few quarters, all the whilst interest rates are high and digging into people's spending power.
Uninsured Americans (Statista)
Notably, the life insurance division stands as a significant driver, accounting for an impressive 71% of the total premium revenue generated by GL. This division plays a pivotal role in the company's business, delivering essential life coverage to policyholders and their families. These life insurance products offer financial security and peace of mind to customers, encompassing various policy types and coverage options to meet the unique needs of diverse households.
Income Statement (Earnings Report)
Looking at the last report from the company, it is clear that higher interest rates are digging into the earnings potential of the business. The interest on debt per share has grown from $0.22 to $0.27 in the last 12 months alone. The long-term debts for the company are at the highest levels in the company's history at $1.3 billion in total. This together with the realized loss on some of the investments the company has led to the net income declining somewhat on a YoY basis.
Earnings Transcript
From the last earnings call that the company had, there are some interesting comments that I think are worth sharing. The CEO of GL Frank Svoboda said the following on the call.
"In health insurance, premium grew 3% to $329 million, and health underwriting margin was up 1% to $92 million. For the year, we expect health premium revenue to grow around 3%. At the midpoint of our guidance, we expect health underwriting margin to be relatively flat and as a percent of premium to be in the range of 28% to 30%".
It seems that decent growth outlooks remain for the company and customer growths are helping with this I think. I do think that the market was expecting more from GL and the last quarter as the share price has not yet recovered to the heights of $120 per share it had in earlier parts of this year. For that to happen I think GL needs to see an even stronger margin expansion which would be fueled by customer acquisitions and perhaps entering new market regions.
"Now regarding our investment yield. In the second quarter, we invested $359 million in investment-grade fixed maturities primarily in the municipal and industrial sectors. We invested at an average yield of 5.75% and an average rating of AA minus and an average life of 24 years taking advantage of opportunities in the municipal sector to obtain higher yield as well as higher quality".
One of the shining factors with GL I think is their strong capability of driving net investment yields higher and ultimately generating a stronger ROE. The company has managed to reach its highest level of ROE in the last 5 years at 15.4% in total. Going forward I think this will be further improved and the sheer capital that GL can invest now will eventually lead to returns available to distribute to investors. The company has a relatively low payout ratio at under 10% but a historical 5-year growth rate to the dividend of nearly 7%. This puts the company in an appealing position to add as a dividend income opportunity, I think.
Valuation & Comparison
GGM Model (Author)
Looking at the model above here, I think it becomes obvious that GL is out of the range of a buy right now. My target price for 2023 alone is $43 based on a required return of 8% and a dividend increase rate of 6%, just slightly below the historical one. What I find appealing though still with GL which results in the hold is that the payout ratio is quite low at under 10%. The chance of raising it to boost shareholder value is certainly there. Raising the ratio to 20% instead would double the price targets, and then, we are not far off from reaching a buy level for the company. With a p/e of around 8 - 9 as well, I think that GL could be a buy-in in 2023. The price target would be $86 and a p/e of 8.5 based on EPS of $10.48 would be $89. For the moment, though, I am happy with a hold rating.
Risk Associated
One noteworthy risk factor to consider is the possibility of prolonged and persistent inflation beyond the current year. In such a scenario, the valuation of GL may come under sustained pressure for an extended period. Investors need to be mindful of this potential challenge and its impact on the company's financial performance.
Inflation Rate (Statista)
Being a provider of insurance as well, the company heavily relies on steadily growing the customer amount to build up the earnings potential further. During a severe recession, individuals and families often face financial hardships, which can lead to a reassessment of their spending priorities. In such circumstances, purchasing insurance policies, especially those beyond essential coverage, may be deferred or deprioritized by consumers. This shift in consumer behavior can result in reduced sales and slower growth for insurance providers like GL. I think that both of these risks are unlikely to make GL a sell anytime soon. What is reasonable to make of the company though is the hold rating I have for them though. Without an appealing price point, there is a lack of incentive to take on the additional downside risk if a correction were to happen now after buying.
Investor Takeaway
Investors who are seeking a solid insurance company should be looking at GL right now, but perhaps not as a buy. The price is still a little too high in my opinion, but with the potential of strong dividend raises in the coming years, it remains to hold though in my opinion. A price target of around $89 I think is reasonable based on EPS estimates of $10.48 for 2023. Until it reaches that level, investors are better off holding shares instead.
For further details see:
Globe Life: Lacking An Appealing Entry Price