Lincoln National: Surging Industry Annuity Sales A Boon, Q1 Results Mask Positive Trends

It was another stellar quarter for domestic annuity sales. According to LIMRA, total US annuity sales totaled $113.5 billion from January through March, a 21% jump from the same period a year earlier. It was barely under Q4 2023’s record sum and the strongest first quarter since LIMRA began tracking data in the 1980s.

There continues to be strong demand for protective investment solutions, be they annuities, structured notes, or buffered ETFs. Insurance providers appear to be in a sweet spot, and higher interest rates today with some stability in the fixed-income market is a boon.

I am upgrading shares of Lincoln National (NYSE:LNC) from a hold to a buy. In late 2023, I was ‘intrigued’ by LNC’s valuation, but stressed that patience was needed with its technical chart. A breakout occurred by late in the year, and shares have been off to the races since.

Strong Q1 Annuity Sales

Calming Interest Rate Volatility

According to Bank of America Global Research, Lincoln National (LNC) is a diversified life insurer offering annuities, individual life insurance, group benefits, and retirement products and services. LNC’s products are distributed through financial planners, wirehouses, banks, and managing general agents.

Earlier this month, Lincoln reported a soft Q1, at least on the surface. Non-GAAP EPS of $0.41 missed expectations by a significant $0.69 while revenue of $4.58 billion, up 8% from year-ago levels, fell shy of consensus estimates by $76 million. Adjusted operating income was hit by material legal accrual charges, severance expenses, a small write-down related to the sale of its wealth management business, and unusual tax expenses.

Back those out, and earnings power was actually somewhat impressive. Ex those items, operating EPS would have been about $1.41. While Lincoln endured a $2 billion net outflow from annuities, index-linked annuities enjoyed strong sales. I would like to see better revenue across segments in the coming quarters after all of the one-off charges in Q1.

So the picture with Lincoln is not as rosy as the annuity industry more broadly. Key risks for the firm include weakness in the stock market, the return of a low-interest rate environment, continued outflows from key segments, and reduced capital deployment. Upside risks include rising equity markets and steadying rate markets along with the announcement of shareholder-friendly initiatives such as bigger dividend payouts and stock buybacks.

On valuation, analysts at BofA see earnings rising 8% this year with a pronounced increase seen in the out year. Operating EPS is expected to verify near $9 by 2026. The current consensus estimate, per Seeking Alpha, is less upbeat than BofA, however. $5.92 is the current view with $8.26 of non-GAAP EPS in 2026 while top-line growth should be strong in 2024, +16%, but slower in the out years in the low- to mid-single digit range.

Dividends, meanwhile, are forecast to rise at a moderate pace over the coming quarters. With a very low price-to-earnings ratio and a high yield, LNC remains a favorite among many value investors.

Lincoln National: Earnings, Valuation, Dividend Yield Forecasts

If we assume normalized non-GAAP EPS of $6.30 over the next 12 months and apply the stock’s 5-year average earnings multiple of 5.7, then shares should trade near $36, making it a buy on valuation. The firm’s dividend yield is also significantly above its long-term average.

LNC: Compelling Valuation Metrics, High Dividend Yield

Compared to its peers, Lincoln sports a very compelling set of valuation metrics while its growth trajectory has been mixed. With strong EPS gains expected in the coming quarters, profitability trends with LNC are not attractive, however. But that is largely due to the unusual expenses taken in Q1.

Still, the sell-side is by no means enamored with Lincoln, given a high 8 earnings downgrades in the past 90 days with no upgrades. Last week, Jefferies bucked the broader trend by upgrading LNC from a hold to a buy given a “return-to-retail” thesis. Share-price momentum has greatly improved from Q4 2023, and I will detail new areas of interest on the chart later in the article.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q2 2024 earnings date of Thursday, August 1 BMO with a conference call immediately after the numbers cross the wires. You can listen live here. Before that, shares trade ex a $0.45 quarterly dividend on Wednesday, July 10.

Corporate Event Risk Calendar

The Technical Take

Last November, I noted key support in the low $20s with resistance at its then-falling long-term 200-day moving average. Notice in the chart below that the bulls defended the support area and brought LNC above its 200dma by late 2023. While $29 had been resistance, a new area of support came about at $25. Over the past several months, $25 has held on a pair of retests while the 200dma is now positively sloped. These are favorable technical developments.

Also take a look at the RSI momentum oscillator at the top of the graph – it’s ranging in the notable bullish 40 to 90 zone. What’s more, there is now a high amount of shares traded underneath the current stock price, suggesting that pullbacks in the stock should be bought into. There’s also little overhead supply of shares until you get to about $40. Finally, it’s possible that $32 – the high from April, acts as near-term resistance.

Overall, there has been a bullish momentum inflection and a positive turnaround in LNC’s technical chart over the last six months.

LNC: Trending Higher This Year, Bullish Momentum, $25 Support

The Bottom Line

I see LNC as a more favorable risk/reward setup today, given the breakout last December. While the Q1 quarter was poor on the surface, the firm’s normalized operations appear in a solid position. With shares still undervalued and a better momentum setup, I view the stock as a buy.