Critical Shifts And Operational Cuts Threaten Long-term Growth And Competitiveness

Key Takeaways

• Strategic focus on capital efficiency and reinsurance may improve cash flow but risk limiting investment in growth and innovation, impacting long-term competitiveness.
  
• Shifts towards more stable cash flow products in Life and Annuity businesses could constrain revenue growth amidst competitive pressures and shifting market dynamics.
  
• Strategic focus on financial stability, operational efficiency, and diverse growth initiatives, particularly in annuities and insurance, aims to enhance profitability and revenue.

Catalysts

Through its subsidiaries, operates multiple insurance and retirement businesses in the United States.

• The completion of the sale of Lincoln National's Wealth Management business and the establishment of an RBC buffer above their target may limit future capital flexibility, impacting the company's ability to undertake new investments or return capital to shareholders, potentially affecting future growth and shareholder returns.
  
• The licensing and operationalization of an affiliated Bermuda subsidiary for reinsurance purposes suggest a strategic shift towards capital management and efficiency. While this could enhance free cash flow, the initial capital allocation and focus on reinsurance might divert resources from other growth initiatives, potentially impacting revenue and earnings growth.
  
• A significant focus on optimizing the operating model, including targeted expense reductions, while beneficial for near-term margins and cash flow, could limit the company's ability to invest in growth initiatives and innovation, potentially affecting long-term competitiveness and revenue growth.
  
• A strategic emphasis on expanding in spread and spread-like products and the repositioning of the Life and Annuity businesses towards products with more stable cash flows might constrain revenue growth if these areas face competitive pressures or do not meet growth expectations, impacting earnings.
  
• The successful execution of a balanced product mix shift in the Annuities business shows potential for solid returns but carries the risk of market volatility affecting product attractiveness and sales. Shifts in market interest rates and consumer preferences could impact the projected growth and profitability targets of these products, influencing overall earnings.

Assumptions

• Analysts are assuming Lincoln National's revenue will grow by 14.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.1% today to 7.4% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $8.64) by about October 2027, down from $1.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.8x on those 2027 earnings, up from 3.2x today. This future PE is lower than the current PE for the US Insurance industry at 13.9x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.23%, as per the Simply Wall St company report.

Risks

• Continuing to build upon a strong capital foundation and maintaining an estimated RBC ratio above 420% enhances the company's financial stability, which supports its investment in future growth, potentially improving net margins.
  
• Optimizing the operating model, including the realization of benefits from prior expense reductions and obtaining a license for an affiliated Bermuda subsidiary, contributes to increased operational efficiency, positively impacting overall profitability.
  
• Delivering profitable growth through diversification and strategic realignment of business segments, particularly in annuities and life insurance, aims at more stable cash flows and higher risk-adjusted returns, supporting revenue and earnings growth.
  
• Strategic investments in talent, capabilities, and technology, especially in the Group Protection and Retirement Plan Services businesses, are designed to improve competitive positioning and drive sustainable business growth, which could result in higher revenues and improved profit margins.
  
• Strong second-quarter performance exceeding expectations, driven by significant growth in annuity sales and solid earnings in Group Protection, indicates effective execution of strategic priorities, potentially leading to improved financial outcomes in terms of revenue and earnings.

Valuation

• The analysts have a consensus price target of $33.27 for Lincoln National based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $20.2 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 8.2%.
• Given the current share price of $30.9, the analyst's price target of $33.27 is 7.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.