Updated on July 9th, 2024 by Felix Martinez
Certain industries tend to produce good dividend-paying stocks more than others.
Sectors like financials tend to produce more cash than they can profitably reinvest in the business, and, therefore, those companies tend to return that cash to shareholders instead.
That means that historically, banks, insurance companies, and the like have generally been reliable in returning cash to shareholders.
One such financial is Lincoln National Corporation (LNC), an insurance company that has raised its dividend for 11 consecutive years.
In fact, that 5.8% yield is good enough for Lincoln to claim a spot on our list of high-yield stocks.
This list contains about 200 stocks with yields of at least 5%, meaning that, like Lincoln, they all yield at least three times that of the S&P 500.
You can download your free full list of all securities with 5%+ yields (along with important financial metrics such as dividend yield and payout ratio) by clicking on the link below:
In this article, we’ll take a look at Lincoln’s prospects as a potential investment today.
Business Overview
Lincoln is a diversified insurance and retirement business that operates in the US. The company has four segments: Annuities, Retirement Plan Services, Life Insurance, and Group Protection.
Through these segments, the company offers various annuity products, defined contribution retirement plan products and services, trust and custodial services, various life insurance products, disability and medical leave insurance, and more.
Lincoln distributes its products through a vast network of consultants, brokers, planners, agents, financial advisors, and other intermediaries.
Lincoln was founded in 1905, produces about $11.6 billion in annual revenue, and trades with a market cap of $5.3 billion.
Source: Investor presentation,
The company reported strong financial results for the first quarter of 2024, highlighting a net income available to common stockholders of $1.2 billion, equivalent to $6.93 per diluted share. Adjusted operating income stood at $71 million, or $0.41 per diluted share, impacted by significant items totaling $164 million.
These included a legal accrual, severance expenses, balance sheet adjustments related to business sales, and tax-related items. Non-economic factors, such as market risk benefits and changes in the fair value of derivatives, also influenced the results.
Growth Prospects
Like most insurance companies, Lincoln has difficulty maintaining earnings growth for more than a couple of years at a time. Insurance companies tend to see profits ebb and flow based on claims, and Lincoln is no different.
Lincoln is different because it is a diversified financial services company with other revenue streams. However, these haven’t been enough for the company to sustain earnings growth over time.
In fact, earnings peaked in 2018 at $8.48 per share, and we believe it may be many years before that number is reached again, if ever.
We see 3% growth from the estimated $4.50 per share in earnings power going forward, which we believe can be driven by a handful of factors.
Source: Investor presentation
Lincoln’s stated strategy includes its Reprice, Shift, and Add New Product strategy, which is focused on ensuring the company offers the right products to the right customers at the right price.
It is a portfolio review of sorts and should also help drive additional revenue with higher margins.
In addition to that, the company is looking at saving roughly $300 million annually with cost savings that should help offset some of the declines in revenue it has faced.
Finally, it focuses on increasing the profitability of the Group Protection segment, which should help grow margins as well.
Lincoln also buys back stock at times, but we note those will be more challenging for the foreseeable future given it now needs to replenish its capital base following the Q3 charge. In all, we see 3% growth for Lincoln moving forward as we put all of these factors together.
Competitive Advantages
Lincoln, like other insurance companies, doesn’t possess much of a competitive advantage. Insurance products are highly commoditized, so it is difficult for entrants to create and sustain any sort of advantage, given that customers generally shop on price.
We don’t see that changing in the years ahead as Lincoln fights for market share while trying to maintain its pricing and margin structure.
Lincoln has built out certain automation and technology platforms to make it easier for customers to buy and use their coverages, but we don’t believe this is strong enough for a true competitive advantage in what is a highly contested industry.
Dividend Analysis
Lincoln has paid dividends to shareholders for more than 30 consecutive years, but the dividend was cut to almost nothing in the wake of the financial crisis.
In the decade-plus since then, the company has raised its dividend each year and recently eclipsed the pre-crisis level of 42 cents per share quarterly; the current payout is 45 cents per share quarterly or $1.80 annually.
The company’s earnings are going to be $5.97 per share for fiscal year 2024. This will give us a dividend payout ratio of 30%.
We expect the company to continue growing earnings at 8% for the next five years and to start growing its dividend.
Final Thoughts
The share price of LNC stock has increased. The stock could still offer annualized total returns of 17.2% in the intermediate term, and the stock is trading at just 79% of our estimated fair value.
We rate shares as a buy for investors who can stomach the volatility in this insurance business. At the current time, Lincoln National appears to be a high-risk, high-reward stock.
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