2023-04-17 00:37:19 ET
Summary
- Jackson's principal business is retail annuities.
- As markets remain volatile, Jackson can benefit from clients who want to avoid ups and downs.
- Management is committed to aggressively returning capital to shareholders.
Along For The Ride
In the world of equity analysis, virtually every company and its future business prospects must take, at a minimum, these two questions into consideration:
- How did it fared as interest rates were hiked up from effectively zero in 2022, and
- How will it fare in a non-zero interest rate environment going forward?
Some companies were caught woefully unprepared for their business to function smoothly as the Fed lifted interest rates away from zero, and some companies have adapted to this new normal and have reasonably good outlooks going forward.
This can be a nail-biting task for investors, who must comb through dense financials and gain a deep understanding of a company's operations and core business before determining the risk a company faces in a rising interest rate environment.
But what if there was a company whose business was (and yes, we're simplifying a bit here) interest rates? In this article we examine Jackson Financial ( JXN ), an annuity provider for retail and institutional client.
Let's dive in.
Background
Jackson was spun off from Prudential in 2021, but the company has been in existence since the 1960s. With its headquarters in Lansing, Michigan, Jackson has three main business segments: retail annuities, institutional products, and closed life & annuity blocks.
Retail annuities comprises a fairly standard sleeve of annuity products such as variable, fixed-indexed, fixed, and registered index-linked annuities (Jackson's fastest growing product). The nice thing about annuities for Jackson is that they are dynamic offerings. In other words, the company can rapidly adjust the terms of each annuity as market conditions change.
Jackson, like other annuity companies, structures its annuity products so that it can earn a spread between what must be paid out to the client over time and what Jackson can reasonably earn in the marketplace. This is, we think, a good place to be. Since annuities have insurance-like guarantees, policy holders can lock in certain guarantees (depending on the policy type) without being fully exposed to the vagaries of the market, while Jackson earns on the spread for bearing the market risk of the contract.
Jackson's institutional products segment is an opportunistic funding operation where Jackson, again, earns a spread on the terms it extends to institutional investors over a two to ten year period. It's closed life & annuity blocks business is a remnant of a business unit from John Hancock--Jackson no longer issues life insurance policies but instead will opportunistically buy blocks of mature life insurance policies.
Buybacks & Dividends
In the short time that it has existed away from Prudential, Jackson has been aggressive about returning capital to shareholders.
Since October 2021, Jackson has returned almost $750 million to its shareholders through buybacks and dividends. In 2021 the board authorized management to repurchase up to $300 million in the company's shares, and increased that authorization by another $300 million in March 2022.
With $106 million in repurchase authorizations remaining at the end of 2022, Jackson announced that the board had authorized an additional $450 million in buybacks in the first quarter of 2023. Management announced on the 2022 full-year earnings call that it had already repurchased $16 million worth of shares year-to-date, bringing the total outstanding authorization to $540 million.
For reference, Jackson has a market capitalization of just under $3 billion, so these numbers are significant. Jackson's share count is also already relatively low at around 81 million shares, and the cumulative result of the buybacks since 2021 means that management has taken 14% of outstanding shares out of circulation.
Combine this with an already strong dividend, and we believe something like a flywheel effect is created--shares are made more scarce and those who hold them continue to be rewarded.
By aggressively repurchasing shares at what it considers to be bargain prices, Jackson also, coincidentally, increases the security of the dividend. Paying a higher dividend to a smaller number of outstanding shares, for example, does not necessarily mean that more cash will be needed since there are fewer shareholders to pay. This has the effect of shoring up the dividend, effectively reducing the burden on the company, which may come in handy in a rainy quarter sometime in the future.
For example, in the fourth quarter of 2022, Jackson paid $35 million in dividends, compared to previous quarter payments of $49, $50, and $52 million. This is, in part, the synergistic effect of buying back stock.
Looking Forward
Since rising interest rates (and a higher rate environment in general) is largely beneficial for Jackson, it is not surprising that the consensus view from analysts going forward in terms of overall sales expectations is trending upward.
Revenue expectations for the company have been steadily rising, which, again, is largely due to higher interest rates and Jackson's ability to capitalize on them.
Risks
Financial companies are highly complex animals, and Jackson is no different. Since Jackson has contractual obligations to its policyholders that it must meet, it must engage in effected (and highly sophisticated) hedging activities. It is also subject to multiple regulatory requirements.
The biggest risk, in our view, to Jackson at this time is a major market dislocation that would cause its hedges to fall apart, or for its hedges to prove ineffective in general. While this risk is always present, we believe that Jackson's performance through the market turbulence of 2022 shows that the company's overall strategy has paid off in regards to its hedging operations, although the risk never entirely goes away.
The Bottom Line
Market volatility breeds a feeling of unease in certain investors, and annuities can be a way for those investors to sleep a little easier. We believe that Jackson's value proposition to these types of investors as well as management's commitment to return capital to shareholders represents an interesting investment thesis for investors. That's why we believe Jackson should be considered for inclusion in a dividend-oriented portfolio.
For further details see:
We Think Jackson Financial Is A Buy: Here Is Why