Stock Analysis

Globe Life Inc.'s (NYSE:GL) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

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Globe Life (NYSE:GL) has had a great run on the share market with its stock up by a significant 14% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Globe Life's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out the opportunities and risks within the US Insurance industry.

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Globe Life is:

16% = US$706m ÷ US$4.4b (Based on the trailing twelve months to September 2022).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.16 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Globe Life's Earnings Growth And 16% ROE

At first glance, Globe Life seems to have a decent ROE. On comparing with the average industry ROE of 13% the company's ROE looks pretty remarkable. For this reason, Globe Life's five year net income decline of 13% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.

That being said, we compared Globe Life's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 12% in the same period.

past-earnings-growth
NYSE:GL Past Earnings Growth December 9th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for GL? You can find out in our latest intrinsic value infographic research report.

Is Globe Life Using Its Retained Earnings Effectively?

Globe Life's low three-year median payout ratio of 11% (or a retention ratio of 89%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

Moreover, Globe Life has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 9.2%. Accordingly, forecasts suggest that Globe Life's future ROE will be 19% which is again, similar to the current ROE.

Conclusion

In total, it does look like Globe Life has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

What are the risks and opportunities for Globe Life?

Globe Life Inc., through its subsidiaries, provides various life and supplemental health insurance products, and annuities to lower middle to middle income households in the United States.

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Rewards

  • Trading at 35.8% below our estimate of its fair value

  • Earnings are forecast to grow 9.4% per year

Risks

  • Significant insider selling over the past 3 months

  • Has a high level of debt

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