2023-03-17 12:33:00 ET
Summary
- JXN's stock price has declined by 22% after the SVB collapse and a difficult macroeconomic environment.
- Despite the challenges, JXN has managed to maintain strong capitalization and a cushion of over five times the statutory requirements.
- JXN recently issued non-cumulative preferred stock with a liquidation preference of $25.00 per share, paying a fixed quarterly dividend at a rate of 8% per annum until March 2028.
Investment Thesis
In the wake of the Silicon Valley Bank (SIVB) collapse, the financial sector experienced a turbulent week marked by increased systemic risk. Unfortunately, this challenging environment also had a negative impact on Jackson Financial's ( JXN ) performance, along with the rest of the industry, resulting in a 22% decline in share price, including a recent 3.5% drop on March 15th.
This comes as the company is just emerging from a difficult macroeconomic environment characterized by atypical disassociation between equity and bond prices, as both assets fell in 2022, breaking from historical correlation.
Despite the challenging macroeconomic environment, JXN has managed to maintain strong capitalization, with Risk-Based Capital "RBC" remaining unchanged and well above the regulatory minimums, with a cushion of more than five times the statutory limits.
This gives me confidence that JXN will successfully manage through the current challenges, which I believe are temporary in nature. For this reason, I am currently buying financials hand over fist, including Bank of America ( BAC ), JPMorgan Chase ( JPM ), and Goldman Sachs ( GS ), and I even bought Credit Suisse ( CS ) after its widespread selloff on Wednesday.
In my opinion, the optimistic stance outlined in earlier articles remains valid, as JXN boasts an attractive valuation, a dominant role in the annuity market, and a capital allocation strategy that benefits shareholders.
For those who may hold a more cautious outlook, whether it be due to the complexity of JXN's business model, intense competition, or potential miscalculations raising underwriting risks, JXN has introduced a fresh series of preferred stocks. This can cater to investors who harbor doubts about the financial sector or seek alternative risk/reward tolerance balance with their JXN investment.
JXN's Preferred Stock: Exploring the New Addition
Earlier this month, JXN issued $500 million of non-cumulative stock with a liquidation price of $25 per share, with a fixed quarterly dividend at 8% per annum until March 2028, when it will reset to a floating coupon rate equal to the rate of 5-year treasury plus 3.8%.
The dividends are payable on the 30th day of March, June, September, and December of each year beginning this month. The preferred Equity has no maturity and is non-cumulative (more on this below).
The notes are listed on the NYSE and traded under the ticker symbol ( JXNFL ). It is rated Ba1 by Moody's, one notch below what is considered an investment grade, with a yield currently standing at 9.3% per annum (distributed quarterly).
Assurance of Non-Cumulative Dividend Payouts: Can We Rely On it?
In the case of non-cumulative preferred Equity such as JXNFL, if JXN misses a dividend payment, it won't add up or be owed to you later. This lack of regulatory obligation is necessary for JXN due to the strict capital requirements that amplify the impact of leverage.
Nonetheless, chances are you'd receive the dividend on the preferred. Paying dividends on non-cumulative preferred stock is critical to attracting investors and maintaining their confidence in the company. Investors are more likely to invest in a company that regularly pays dividends on its preferred stock, even if those dividends are not required.
JXNFL dividends are also senior to common Equity in terms of distribution and are entitled to the stated coupon payments before any are made to common shareholders. Management has clearly stated its commitment to a common stock dividend, increasing the chances that you'll receive a payment on your preferred investments.
Finally, JXN will likely choose to pay dividends on its non-cumulative preferred stock as a matter of good corporate governance and to maintain a positive relationship with its investors. Even if they are not required to pay dividends, management may view it as a way to show their commitment to shareholder value and maintain a positive reputation in the market. This is especially true for a company like JXN, which has only been operating as a standalone company for one year and is still finding its shareholder base.
While the non-cumulative feature may create some apprehension surrounding management's commitment and intentions to pay dividends on the preferred, these worries are less grounded in reality than worries about its ability to actually make these payments. Below is a discussion of JXN's financials.
JXN Revenue Trends and Profitability Drivers
JXN's primary business is providing retirement products and services to customers in the United States, namely annuities designed to help individuals accumulate wealth, protect their financial future, and generate income during retirement.
An annuity is a financial product that you can buy from an insurance company to help you save for retirement. It's like a special kind of savings account in that you contribute money over time. In return, the insurance company promises to pay you a guaranteed amount of money every month or year for the rest of your life after you retire.
The company's primary source of income is the management fees it collects for providing this service, often calculated as a management fee rate on the account balance. This method of calculating revenue leaves JXN susceptible to movement in the stock and bond market, the primary assets underlying its annuity products. As bond and equity prices fell, the fair value of the company's Assets Under Management dropped by about $70 billion (19.4%) to $290 billion, down from $359 billion in 2021. For this reason, we saw revenue decline by $1.7 billion (8%) to $18 billion, down from $19.8 billion a year earlier. The company's revenue and earnings volatility serves as a reminder of the cyclical nature of JXN's business model.
Dividend Safety
JXN's $500 million preferred Equity is aimed to repay $600 million senior notes maturing in November 2023. Based on a coupon rate of 8%, the expected dividend payments on the new preferred shares are about $44 million annually, not too much different from the $34 million interest expense it will save from retiring the senior notes. Thus, the overall impact of the issuance of the preferred is minimal. All in all, I expect interest and preferred dividend expense not to exceed $150 million, a small amount compared to the company's $1.6 billion adjusted EBIT, $5.7 billion net income, and $5.2 billion in operating cash flow. The company's obligations are just too small compared to its scale, providing a comfortable cushion that adds to the safety of its dividend distributions.
Summary
Despite the recent turbulence in the financial sector following the collapse of SVB and the atypical disassociation between equity and bond prices, JXN has maintained strong capitalization, with Risk-Based Capital "RBC" remaining unchanged and well above regulatory minimums, allowing for flexibility in investment, product development, strategic initiatives, and dividends and share buybacks. JXN's new series of non-cumulative preferred stock offers investors a stable, fixed-income investment with a relatively high yield of 8% per annum until March 2028, when it will switch to a floating coupon at a rate equal to the 5-year T-bill rate plus 3.8%. Although it does not have a cumulative feature, companies like JXN are more likely to pay dividends on their preferred stock even if they are not required to, as it is critical to attract investors and maintain their confidence in the company.
With obligations (interest and dividend expense) that are expected to not exceed $150 million, investors enjoy a sizable cushion that enhances dividend and distribution safety.
For further details see:
Jackson Financial Weathers Selloff: Buy Opportunity And Preferred Stock Available