2023-08-04 08:05:46 ET
Summary
- Voya Financial has seen impressive growth due to its diversified revenue streams and strategic acquisitions.
- The company has a well-diversified investment portfolio and is taking steps to derisk its portfolio profile.
- Higher interest rates have positively impacted Voya's bottom line and dividend, making it an appealing hold for investors.
Introduction
Voya Financial Inc ( VOYA ) has built up a solid base of various revenue streams that has ensured impressive growth over the last couple of quarters. Operating in the diversified financial services industry VOYA is very efficient in leveraging its position and making strategic acquisitions to fuel growth. The acquisition of AllianzGI has ensured strong capital growth and most recently the company had $500 million in excess capital, representing a 90% of adjusted operating margin capital generation.
The share price for VOYA has been steadily increasing over the last couple of months and now sits at a p/e of 9 and a p/b of 2. These are levels that don’t suggest VOYA is an undervalued play right now in comparison to the sector. I think investors will benefit though from the dividend and the buybacks the company continues to do. This makes a hold still very appealing in the company and that is what I view them as also. Rating VOYA a hold.
Company Structure
Voya has been in business since 1999 and in 2014 made the switch from ING US Inc to the name it has today. During its years of operations, the company has grown quite impressively and now sits at a market cap of $7.4 billion. The company has had a history of a rather risky portfolio but is taking steps to derisk its portfolio profile and its showing potential. One could view the company as more of a rebound play or a turnaround history as VOYA is building a stronger foundation for the business to fuel future growth.
Portfolio (Investor Presentation)
The investment portfolio of the company has grown to a very well-diversified state where the largest section is 30% and lies in public corporate investment-grade assets. The total value of the investment portfolio is $40 billion and 96% is investment graded.
In terms of the company structure for VOYA, they have built it up through three various segments, these being Wealth Solutions, Investment Management, and lastly Health Solutions. As I mentioned earlier, the revenue streams are very diverse for VOYA and the segments showcase this too. The first segment focuses on retirement savings plans and administrative services too. Besides this, they also offer individual retirement accounts and retail financial products and services. Within the second segment, operations revolve around fixed income, equity, and muti-asset products which are provided to investors and clients through investment management services. Lastly, the health solutions segment offers stop loss, group life, and also voluntary employee-paid products which are provided through consultants and brokers.
EPS Guidance (Investor Presentation)
In a higher interest environment, it seems that VOYA is very much able to grow its bottom line and margins to fuel a strong dividend. Quite recently the company even announced a 100% increase to the dividend which seems to have added fuel to the fire that is driving the share price. The quarterly dividend for VOYA is now $0.4 up from $0.2 and this gives VOYA a FWD yield of around 2%. With this raise and the promising EPS growth they seem to predict I think we are in for more dividend raises in the medium term and this bolsters a hold rating for the company. but overpaying for it isn't necessary I think.
Earnings Transcript
The company very recently released their latest report and there are some comments from the earnings call below here I'd like to highlight. Given that the price is my key issue with not making it a buy, I could view VOYA as a buy if we see a significant pullback after the report. Pullbacks seem to be quite common in this current market after earnings, even if they are solid reports, just seems like a buy-the-rumor and sell-the-news environment.
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"We generated approximately $200 million of capital this quarter, and our free cash flow conversion rate remained above 90%. Because of our confidence in our continued ability to consistently generate strong free cash flows, we are doubling our common stock dividend this quarter to $0.40, or approximately 2% yield. We've also resumed share repurchases, deploying $162 million this quarter as part of our consistent emphasis on returning capital to shareholders in a disciplined manner. Our board has provided a further $500 million repurchase authorization to facilitate our continued execution on this approach".
Seeing the resuming of share purchases here is making me positive about the future of shareholder value here. With a strong cash flow conversion rate also comes the fact that shareholder-friendly practices like this are easier to keep up. The strong growth of the dividend is also indicating that the comapny is seeing more growth ahead and is in a good state to reward shareholders right now too.
Q2 Performance
The results from the last quarter showcase that VOYA is still in its growth phase. The outlook remains as the management expects a 12% - 17% EPS growth over the next few years at least. For Q2 the EPS grew by 30% YoY which to me highlights the strong capability of the business to leverage its portfolio and position to deliver shareholder value.
As for some of the trends that VOYA experienced in the quarter, there continued to be new client growth in the Wealth Solutions segment which drove EPS higher. VOYA continued to showcase its ability to perform above peers and the industry as the Investment Management outflows were $(3.7) billion, which despite headwinds was an outpace of the industry.
The company made strong strides in delivering shareholder value as $162 million was used for share repurchases and another $500 million was authorized. This is one of the key points as to why I think that VOYA can still deliver an above-market ROI from here on out. But investing more when the valuation provides a better margin of safety still seems advisable.
The balance sheet remained robust in the quarter and VOYA also continued improvements and maintenance on their CML portfolio. The portfolio continues to extrude quality as VOYA maintains a high-quality asset base here. This has continued to benefit VOYA as the ROE sits at 14.1% TTM right now. Highlighting the continued ability the company will have to pass out earnings to shareholders.
Valuation
Looking at the valuation of the company a little closer we see that the VOYA is trading slightly below the sector at a p/e of 9.2, just 5.5% below. I would prefer a slightly better discount, somewhere around 10 - 15% instead in order to secure what I think could be good returns.
Where the valuation does seem a little too much is when looking at the p/b instead, which sits at 2.2. This is far above where VOYA has normally been trading, over 100% more. This does leave less support for the share price to fall back on and does worry me slightly. What could constitute a valuation like this could be a higher dividend yield in my opinion. In a lot of cases, a very high dividend yield could constitute a lower multiple as more earnings are going to shareholders as opposed to future growth investments. But for VOYA to raise the dividend and get to a 2 - 2.5% yield could in my opinion make it more reasonable at these prices. As long as it's not trading in the discount window I want I won't be making it a buy, but rather a hold instead.
Risk Associated
Voya's risk profile has undergone significant improvements over the years, mainly due to the shift towards a fee-based revenue model, which has resulted in a more stable and recurring revenue stream. This strategic transition has reduced the company's reliance on spread-based revenues and positioned it for more predictable financial performance over the medium to long term.
Company Focus (Investor Presentation)
Furthermore, the fee-based revenue model aligns Voya's interests with its clients since the company earns fees based on the performance of the assets it manages. This alignment fosters a long-term relationship with clients and incentivizes Voya to pursue sound investment strategies that prioritize the growth and protection of client assets.
Investor Takeaway
For investors who seek a stable dividend-distributing company that is also actively buying back a lot of shares then I think VOYA right now offers some decent potential. But as I am more keen on entering at a better price point I don’t think the p/e of 9 and p/b of 2 is fair to buy. I would rather have lower multiples which helps improve my margin of safety. This concludes me rating VOYA a hold right now.
For further details see:
Voya Financial Q2 Earnings: Solid Growth But Too Expensive Right Now