2023-12-26 16:48:31 ET
Summary
- Primerica, Inc. gets a Hold rating today.
- The company shows strength in revenue, earnings, and equity growth driven by a diversified business mix across insurance and investments businesses.
- The share price remains elevated above its moving average, and dividend yield is below 2% and lower than several insurance peers.
- The asset risk exposure is primarily tied to fixed-income securities.
Stock Snapshot
With today's research note being right before the new year, I am picking a relatively under-covered stock but a major player in the financial services space.
It is none other than Primerica, Inc. ( PRI ) , the Georgia-based company with roots going back to 1927.
Some other quick facts about this company are that it was rated the #1 most trusted life insurance company by Investor's Business Daily , is known for providing financial services to middle-income households in North America, and also distributes through a national network of licensed reps.
The types of products it deals with include mutual funds, term life policies, annuities, and more.
Scoring Matrix
We use a 9-point scoring method that looks at this stock holistically and assigns a total rating score, using a score matrix.
Today's Rating
Based on the score total in the score matrix below, this stock is getting a rating of hold.
Compared to the consensus rating on Seeking Alpha, I am agreeing with the SA quant system this time:
Primerica - rating consensus (Seeking Alpha)
Dividend Income Growth
What the dividend growth chart in Seeking Alpha can tell us is that this stock's dividend has seen a steady upward growth trend since 2013 without interruption.
If my portfolio had acquired a hypothetical 100 shares back in 2013 when the annual dividend was $0.44, we would have seen $44 in annual dividend income. By 2022 when the annual dividend was $2.20, that would have been $220 in income, a 400% growth in 10 years.
Further, in 2023 the dividend grew even more, and this year's annual rate is $2.60 (for $260 income on 100 shares).
If we assume the same 400% growth percentage for the next 10 years, which is just a guesstimate, by 2033 we could see $1,100 - $1,300 in annual dividend income on those same 100 shares we did not touch.
As evidence of its ability to return capital back to shareholders, its Q3 earnings results mention the company "repurchased $106 million of our common stock and paid $23 million in stockholder dividends."
In this category, I'll be calling this stock a strong buy , on the basis of proven triple-digit dividend income growth as well as capital strength and continued dividend growth heading into 2024.
Dividend Yield vs Peers
In this section, we will use the dividend yield comparison chart from Seeking Alpha to compare Primerica against the yield of three peers.
For this comparison I picked three large companies heavy in the insurance space along with other financial products. These are Prudential Financial ( PRU ), Aflac ( AFL ), and MetLife ( MET ).
This sector in a nutshell essentially collects a vast amount of premiums from its policyholders, and has a goal of keeping more cash than it has to pay out in policy claims each year. Any extra cash, after company expenses, is usually "invested" into a portfolio of interest-earning assets, to make even more money.
So, they all have the cash, it seems, to pay out dividends to shareholders, but the goal here is to pick just one to add to a portfolio of financial-sector stocks, the one with the best yield on capital invested.
In this case, Primerica's dividend yield of 1.24% came in last in the group, while Prudential led the way with a yield of 5.23%, and MetLife trailed behind it at 3.23%
So, I would not call Primerica a buy here since I can get a much better yield at Prudential or MetLife, which are also much bigger and stronger companies I would say. In this category, Primerica is more of a sell at such a paltry dividend yield.
Revenue Growth
To understand revenue YoY growth we turned to the income statement .
We can see its core business of earning premiums on its insurance policies has grown on a YoY basis, along with interest income which has also grown.
For Q3 they saw total revenue of $727MM, vs $689MM in Sept. 2022, a 5.5% YoY growth.
According to their Q3 results , the company highlighted some factors that helped drive success: Consistent in-force premium growth and strong term life policy sales —Growth of client asset values —Higher net investment income.
Also worth noting is their vast network of licensed agents that help drive sales. In fact, they have a "life-licensed sales force of more than 139,000 representatives; up 4% year over-year."
Beyond insurance, within their investment and savings shop some key metrics to care about are net client inflows into the firm as well as growth in asset values.
The data shows that within this business segment not only did sales grow but so did asset values too. This helps diversify the company revenue mix beyond just insurance.
Primerica - investment products (company Q3 results)
In this category I would call this stock a buy, due to modest single-digit YoY growth along with double-digit growth metrics in its non-insurance business, but also looking forward I expect asset values to increase as equity markets continue to improve going into 2024.
Earnings Growth
Now, to the bottom line, where we can see from the income statement that earnings (net income) grew to $152.1MM in Q3, vs $79.6MM in Sept 2022, a +91% YoY growth.
The company's outlook indicates that we can "expect fourth quarter 2023 expenses to increase around $4 million, or 3% year-over year."
A major driver of costs for an insurer can be a certain quarter where they saw an unusually high number of policy claims, and when it comes to life insurance it could be an uptick in deaths that quarter.
However, we see policy benefit payouts only went up by about $2MM YoY. Total operating expenses, however, went up about $20MM. We also saw interest expenses drop on a YoY basis.
This begs the question, is the company's profitability "sustainable" going into 2024?
I say it is, due to continued growth in both their insurance and non-insurance segments, along with a continued elevated interest-rate environment that will benefit interest-earning investments.
In this category, I will call it a strong buy on the basis of proven double-digit earnings growth.
Equity Positive Growth
This firm's balance sheet can tell us another story and that is what the equity/book value situation is. My portfolio strategy is to invest in companies with a steady history of positive equity that grows annually.
In the case of Primerica, we know that equity grew to $2.3B in Q3, vs $1.62B in Sept 2022, a 42% YoY growth in equity.
More good news is that corporate long-term debt has not risen much in Q3 as it went up to $2.01B, vs $2.02B in Sept 2022.
The value of its debt securities worth +$4B also seems to have gone up since the prior year's quarter.
In this category I would call it a buy as well, on the basis of strong double-digit equity growth and flat debt growth.
Share Price vs Moving Average
The price chart below tells us two things: the most recent share price of $205.91 (as of this article writing) and its relationship to its 200-day simple moving average of $194.85.
The share price is about +5.6% higher than its moving average , and has been trending in bullish territory above the average for the entire year it seems.
So, no real dip opportunities or crossovers below the average to speak of here. In this case, I would call it more of a hold opportunity at this price being above average since the revenue, equity, and earnings were impressive however the dividend yield is not.
I expect continued modest bullishness at least, driven by the general bullishness lately in the financial services sector which you can see from Seeking Alpha's market data tool :
Primerica - market data (Seeking Alpha)
Valuation: Price-to-Earnings
From valuation metrics , we can see the GAAP-based forward P/E ratio is around 12.94, or +15.7% above its sector average.
What I think is driving this multiple of nearly 13x earnings for Primerica, when tying back to the discussion on share price and earnings, is the fact that the share price has mostly been in bullish territory trading above its long-term moving average and this is driving the multiple as the market is highly bullish on this stock.
However, at the same time we can see double-digit earnings growth at this firm.
So, I am on the fence with this multiple of 13x and would call it a hold rather than a great buy or a sell. On the one hand, the share price is a bit high but you are getting a profitable company that continues to grow earnings, so this valuation I think is modestly justified.
Valuation: Price-to-Book Value
Also from valuation data, we can see the GAAP-based forward P/B ratio.
We can see it is 3.07, around 153% above its sector average.
Again, I believe the driver of this 3x multiple is the bullish share price trading above average, despite equity also growing by double-digits.
I would call this valuation a hold again rather than a buy or sell, on the basis that although the market is driving the share price up at the same time the equity is growing nicely too, though perhaps not as much as it could to catch up to this bullish share price and close the rift here between price and book value.
I think the equity will have to continue to grow, since I already expect financial services stocks to continue rising, otherwise the valuation will be even worse.
Risk Analysis
The risk to briefly talk about here due to the nature of this business is its exposure to certain types of assets. We already mentioned that it invests extra cash into an asset portfolio to earn more money. However, is it exposed to higher risk assets such as commercial real estate / office property?
The answer is not so much.
If you look at their most recent asset portfolio, it does not have much in the way of commercial real estate exposure. But rather, its main exposure is to fixed-income securities, of which they have over $2.5B worth in their portfolio.
You can also see the value of these has gone up since December.
We know it is an industry fact that bond interest yield and bond prices (values) move in opposite directions, and we can see from the chart below courtesy of US Bank that we may be seeing a reversal in the 10-year treasury yield (US10Y):
10 yr treasury yields (USbank)
So, going forward into 2024, a year when the Fed has already indicated the "possibility" of rate cuts at some point, I think the bond-rich portfolio of Primerica will benefit in the form of rising asset values on those fixed-income assets.
Hence, I will say in this risk category, Primerica, Inc. stock ought to be a hold . This is because although lower rates may drive bond values up, it also can lower potential interest-earning income on those bonds as they start earning on lower rates. It will benefit the balance sheet but impact the income statement , so a double-edged sword and double-edged risk, too.
Quick Summary
To briefly summarize, I am making a neutral call on Primerica, Inc. stock today and giving it a hold rating.
Its dividend yield is nothing impressive although its dividend growth is. In addition, its share price has been trending above its moving average for quite a while and not offering a dip-buying opportunity yet, while at the same time the company's earnings and revenue has grown as has its equity.
Its risk profile is lower than those exposed to a lot of commercial real estate such as office properties, however holding a mostly fixed-income book also exposes one to interest-rate risk.
Primerica, Inc. is one of those stocks that I would not jump into at this price, but would not sell either, as it has a lot of strong fundamentals going for it and I continue to say the financials sector will continue rising and bring this stock up with it.
For further details see:
Primerica Lacks In Dividend Yield But Crushes It In Revenue And Earnings Growth