Summary
- Jackson Financial is poised to thrive in 2023 and beyond on the growth of the annuity market.
- Jackson Financial is trading with a deep low valuation level which leaves plenty of room for the upside for the stock.
- Earnings are expected to grow at a strong double-digit pace in 2023, which is likely to drive the stock to outperform.
Jackson Financial ( JXN ) looks poised to outperform in 2023. The company has a deep, low valuation which leaves plenty of room to the upside for the stock. The annuity market which the company is involved with is expected to grow at a strong pace in 2023, which is likely to catalyze the stock for above-average gains. Jackson Financial has a dividend yield of about 6%. So, the stock looks like a strong potential winner for investors in 2023.
Jackson Financial offers a comprehensive collection of annuity products to investors in the United States. Jackson is a leading seller of retail annuities in the United States. The company operates three segments:
1. Retail Annuities - This segment comprises 87% of Jackson Financial's total operating earnings and provides a variety of retirement and income savings products such as fixed and variable annuities, immediate payout annuities, and registered index-linked annuities.
2. Institutional Products - This segment comprises 5% of total revenue and offers Guaranteed Investment Contracts and funding agreements.
3. Closed Life and Annuity Blocks - This segment comprises 8% of total revenue and offers whole life, term life, universal life, and fixed annuities.
Expected Growth for the Annuity Market
Since most of Jackson Financial's revenue comes from annuities, the growth in the annuity market is likely to be a positive tailwind for the company's growth. The U.S. annuity market is expected to grow at about 4.7% annually to reach $298.7 billion by 2026.
Recessions and uncertain economic situations tend to increase the sales of annuities. Consumers are on track to spend $300 billion in annuities in 2022. This is a record amount being spent on annuities. The previous record was set during the financial crisis of 2008. The increased interest in annuities provides some investors with peace of mind in the midst of a volatile and declining stock market like the bear market that we are in right now.
The average annuity buyer is age 60. Most of those who are interested in buying annuities begin buying around age 55. The aging baby boomers are likely to drive multiple years of steady growth in the annuity market. About 10,000 baby boomers are retiring every day. 75 million are expected to retire by 2030. This creates a large potential market for annuities.
Many who are close to or in retirement might consider annuities due to their steady payments that they provide, giving investors some stability and predictability during uncertain times. The current environment of a possible looming recession combined with the large amount of people retiring create positive conditions for the annuity market.
Deep Low Valuation
Jackson Financial is trading with a deep, low valuation on every metric. This should give the company some downside protection as compared to stocks with much higher valuations.
The chart above demonstrates how low Jackson Financial is trading. Jackson is trading below the Life Insurance industry's forward PE of 9.28 and price to book ratio of 1.33. The company is also trading significantly below the S&P 500's ( SPY ) forward PE of 17.4 and price to book ratio of 3.75. The low valuation provides plenty of upside potential as the company continues to grow.
So why is Jackson Financial trading with such a low valuation? Well first of all, the Life Insurance industry which Jackson is lumped into tends to be valued below the broader market. Of course, Jackson is significantly valued below its industry. Jackson is underfollowed and probably not understood by many investors.
Another reason for the low valuation is because Jackson Financial is a spinoff from Prudential Financial ( PRU ). The spinoff completed in September 2021 . Many investors tend to selloff spinoffs after they show up in their accounts. This could be because investors don't want to take the time to understand the business or they feel if the parent company didn't want it, then neither do I. Jackson's stock declined in 2022 after a brief rally at the end of 2021. Despite the low valuation, I see Jackson as a deeply valued company with lots of upside potential.
Balance Sheet/Credit Rating
Moody's has a Baa2 rating for Jackson Financial. The Baa2 rating is considered lower medium grade. For context, a Baa3 rating would be the next notch lower, but still above 'junk' status. Jackson Financial is currently rated 2 levels above junk status and 3 levels above non-investment grade status (Ba2). So, the company has a lower level investment grade credit rating.
The company has $5.3 billion in total cash and equivalents and $4.6 billion in total debt, giving them net debt of $687 million. The net debt shows that Jackson is not overleveraged. The balance sheet shows $303 billion in total assets and $293 billion in total liabilities for total equity of $9.7 billion. Jackson also has $63.8 billion in total investments which includes debt securities, equity and preferred securities, mortgage loans, policy loans, trading asset securities, and real estate owned.
Jackson has good historical net capital generation and the company benefits from a successful hedging strategy. The company hedges its variable annuities. However, it is important for investors to be aware that the company has significant exposure to capital volatility and equity markets.
The most recent 10-Q filing shows that Jackson Financial holds various derivatives such as: cross currency swaps, equity index call options, equity index put options, equity index futures, interest rate swaps, cross currency swaps, cross currency forwards, funds withheld embedded derivative, put swaptions, and interest rate futures. That mix of derivatives resulted in a net gain of $7.9 billion over the first nine months of 2022. This was a significant improvement over the $805 million net loss that Jackson had over the same period in 2021 from derivatives. So, Jackson was highly successful so far this year with its derivatives in a market where equities declined.
The company's derivative positioning in 2022 could set the company up for more gains in 2023 as markets look negative as some are expecting an over 60% chance of recession . Jackson can always change the mix of its derivatives to benefit from the expected market outlook/probabilities.
Jackson's investment portfolio is conservatively positioned with only 1% exposure to below investment grade securities . The company has a high quality bias in structured securities and commercial mortgage loans.
Positive Cash Flow
Jackson Financial consistently produces positive cash flow . The company had $5.1 billion in operating cash flow over the past 12 months. Jackson was left with $4.8 billion in levered free cash flow over that period. Jackson handles the following activities with its cash flow: paying down debt, repurchasing stock, paying dividends, and of course paying out annuities.
Jackson's positive cash flow gives the company the flexibility to run the business, expand the business, and to reward shareholders. The company pays an attractive 6% dividend based off the quarterly payments over the past 12 months. The dividend has a 12% payout ratio, giving the company strong dividend safety .
Jackson has a free cash flow yield to dividend yield ratio of 26.67% which is considered excellent. The sector median stands at only 4.63%. The company also has an excellent dividend yield to dividend payout ratio of 50.53% which also significantly beats the sector median of 9.71%. These ratios illustrate how strong Jackson's cash flow is. The company has plenty of money for running the business and rewarding shareholders.
Jackson Financial's Overall Outlook
Jackson is expected to grow revenue at about 10% in 2023 . Earnings are expected to increase by about 17% next year. The company's high return on equity [ROE] of 73% helps drive Jackson's strong earnings growth. This crushes the sector median ROE of 11.55%. The high ROE demonstrates management's effectiveness of getting a strong bang for the buck in terms of equity. Adding to this strength is a high ROIC of 39% which also outperforms the sector median of 5%.
The company's strong growth is likely to drive the stock to outperform in 2023 from the low deep valuation. Many investors in or near retirement are likely to consider the steadiness of annuity payments in the face of market volatility leading up to a possible recession.
Jackson has been doing an effective job with its hedging strategy in 2022. I expect that to continue in 2023. The company can benefit from the expected growth for the annuity market in 2023 and beyond as large numbers of people will be nearing and entering retirement.
Jackson's stock has the potential to significantly outperform the broader market with an ROE of 73% to drive earnings for an above-average double-digit gain. Even a doubling of the stock price within a year to $72 would have the PE ratio at a low 4.1 from the current level of 2.4. Frankly, I don't know what is going to happen with the stock, but chances look good for the long-term with Jackson's combination of a deep low valuation and strong growth.
Editor's Note: This article was submitted as part of Seeking Alpha's Top 2023 Pick competition, which runs through December 25. This competition is open to all users and contributors; click here to find out more and submit your article today!
For further details see:
Jackson Financial: 6% Dividend Yield, Deep Low Valuation, Strong Expected Growth For 2023