Summary
- Primerica recently announced an 18% dividend increase, so it is time to take a look at the company again.
- Over the past year, earnings estimates have come down considerably at the same time the price has increased significantly.
- The current valuation indicates that the company is slightly overvalued.
It has been nearly a year since I last wrote about Primerica ( PRI ), and following the whopping 18% dividend raise this month, I decided it was time to revisit the company.
Primerica is a life insurance company with a different business model than the norm. It is essentially an MLM of insurance. As in, its clients tend to become its agents. As of November 2022, the company had over 134,000 licensed agents. To put this in perspective, Unum Group ( UNM ) generates about four times the revenue with only 10,300 total employees. Granted, they have a different mix of products, but the difference is striking.
However, even though Primerica brings a unique business model to an industry primed for disruption, it doesn't stop them from succeeding. The company has proven to be hugely profitable, growing earnings rapidly over the past decade.
What's Changed?
When I last covered Primerica, it traded at a P/E well below its historical normal. At the time, the company was trading at a P/E of 11, significantly below its average P/E of 13.6. While a company's deviation from its average ratio doesn't mean that the price will move to correct in the short term, it does have meaning in the long term. Market sentiment drives short-term prices and can vary wildly from fundamentals. However, at the time, I gave Primerica a buy rating based on several factors.
Today, the company has increased in price significantly, and at the same time, earnings came in below forecasts. This, coupled with reduced forward projections, has caused the current P/E ratio to spike closer to 15.5, above the historical normal. Primerica generally stays in a tight P/E range, so the current ratio isn't cause for alarm, but it's also not indicative of a bargain price. The Fastgraph below shows the current price (black line) related to the normal P/E (blue line).
It's also important to look at PRI compared to its peers. It has regularly traded at a premium to its peers and continues to do so today. Much of this is due to its fast growth and superior profitability; however, the significant premium offers a reason for underperforming at the slightest stumble. Seeking Alpha offers a variety of comparison valuation metrics with peers, which are shown below. Primerica is at a massive premium to the peer group.
Not only has the price gone up, but forecasts have come down. While this is common across nearly every company in every industry, it is reasonable to speculate if the current forward estimates are too aggressive. The table below shows the 2022-2024 estimates from April 2022 vs. today. The 4th quarter earnings will be out in a few days, and a clearer picture will develop.
Wyo Investments - data from a variety of sources
One of the draws of Primerica has been its fast growth. Since 2010, the company has grown earnings per share ((EPS)) at nearly a 15% annual rate, including a 6% estimated decline in 2022. It is unlikely that PRI will maintain this rapid growth in the future; however, long-range estimates still project double-digit earnings growth.
Cash Generation
One of the draws of Primerica is its consistent and growing cash generation. Over the past decade, the company has increased its operating cash flow by around 20% per year. Additionally, because the insurance industry isn't capital intensive, nearly all the operational cash flow is turned into free cash flow. This is shown in the chart below.
Stock Buybacks
When done correctly, stock buybacks can be a boost to investors. Primerica consistently uses buybacks to reduce the share count, having reduced the share count by nearly 50% since 2012. Additionally, the current buyback of $375M for 2023 equates to almost 6% of the company. Primerica's consistent buybacks will continue to add to EPS growth for the foreseeable future.
Current Risks
As with everything in today's high-priced market, caution is warranted. The potential shadow of a recession is still looming, although it is increasingly being dismissed. In November, Primerica warned that they were being affected by "households feeling the pressure of inflation" and saw a 6% reduction YOY in new life insurance policies issued. These pressures are unlikely to recede in the short term.
Additionally, the significant valuation premium given to Primerica over its peers is always a concern. Premium valuations require superior performance. A perceived continued performance slowdown could lead to rapid multiple contraction for Primerica. At present, growth is expected to resume its fast clip in 2023, but it will be critical to see what kind of guidance the company gives when they report 2022 year-end results this week.
Dividend Yield Valuation
While the company's valuation today is slightly above average, the dividend yield shows a better valuation. After the most recent dividend raise, the company has a yield of 1.5%. The chart below shows that the company has rarely reached this yield level.
Summary
Ordinarily, I consider a company trading at such an abnormally high yield a buy. However, Primerica is a hold when considering the slightly higher-than-normal valuation and a higher valuation than its peers.
There are too many economic risks at this time, and the premium valuation makes the company ripe for a drop. While the market is currently experiencing a "risk-on" sentiment, this could change quickly. Companies with premium valuations, like PRI, will see the brunt of the correction.
In the long run, Primerica continues to show no signs of slowing its rapid growth. It is set to continue growing the dividend rapidly well into the future and experience significant price appreciation. However, given the abovementioned risks, it is a hold for now.
For further details see:
Is Primerica A Buy Before Earnings?