- National Western Life Insurance is a provider of life insurance products with a pristine balance sheet.
- NWLI’s stock is undervalued relative to the value of its assets and earnings potential.
- NWLI is heavily controlled by its founder and other insiders.
In the late 1960s, Stanford University psychologist, Walter Mischel, began a series of studies on delayed gratification. In these studies, which have since been analyzed and written about countless times, a child was offered a choice between an immediate reward (a marshmallow) or double the reward (two marshmallows) in fifteen minutes. The subjects of the studies were then followed into their adulthood. The children who had chosen to wait fifteen minutes for the larger payoff tended to become more successful in life. Those children did better in areas such as SAT scores, fitness, and educational attainment. Value investors, like the children who were able to wait the fifteen minutes, are able to delay immediate gratification for future rewards. However, unlike the children, value investors often do not know how long they have to wait to finally get their rewards.
When I buy stocks (exceptions include special situations), I look to buy either company assets or earnings potential at a discount. In the past I have written about companies like Microsoft (NASDAQ:MSFT) that are good examples of offering their earnings potential at a discount. Other companies such as Deswell (NASDAQ:DSWL) and Gencor (NASDAQ:GENC) are excellent examples of companies whose assets are selling at a discount. With current equity valuations, it is rare to find a company that is selling at a discount with regards to both its earnings potential and assets. Despite about a 50% price increase in the past year, National Western Life Insurance Company (NASDAQ:NWLI) is a rare gem still selling at a large discount to the value of its assets and its earnings potential.
NWLI provides life insurance products in 49 US states and the District of Columbia. It also sells insurance products to mainly wealthy individuals internationally. The company was chartered in the State of Colorado in 1956 and is based in Austin, TX. Its stock is divided into two classes. The current Chairman of the Board and CEO, Robert Moody, who acquired the company in 1963 owns 99% of class B stock. He and various family members are firmly in control of this company. Holders of class A shares elect one third of the Board of Directors. Class B holders elect the remaining members. Insiders, as a group, control 99.8% of class B shares and 34.8% of class A shares. Aside from voting rights, class B shareholders have no other rights over class A holders. In fact, class B holders are entitled to only half the dividends of class A holders. NWLI distributes very small dividends. The Board of Directors is comprised of numerous Moody family members. The CEO's son, Ross Moody, is the President and Chief Operating Officer of the company.
Mr. Robert Moody has been an outstanding steward of NWLI. In the past fifty years he has grown the company's assets from less than $20 million to nearly $11 billion. To say that the company adheres to conservative accounting principles for an insurance company is an understatement. From the company's 2013 annual report:
"In their most recent analysis of the company, Standard & Poor's even went so far as to indicate that National Western's capital is 'redundant at the AAA level as per our risk-based insurance capital model'."
The company has zero debt and has been generating solid earnings for years. State insurance laws restrict dividend amounts without prior approval. For 2013 the maximum dividend payment which NWLI was allowed to pay to shareholders without prior approval from the Colorado Division of Insurance was $100.5 million. This is approximately $27 per share. In 2013 NWLI distributed only $0.36 of dividends, a tiny fraction of the allowed amount. NWLI's conservative accounting principles have enabled it to achieve one of the most pristine balance sheets in the industry.
Below is a table of the company's revenues and earnings (value in thousands except per share amounts) for the past decade (source: NWLI 2013 annual report).
Premiums and Contract Revenues
The company has delivered positive earnings consistently even in the dark years of the recession. At the current stock price of about $235, NWLI's PE ratio is less than 9. Besides generating consistent earnings, a great company must also translate those earnings into shareholder wealth. As I will show below, NWLI has turned its earnings into shareholder equity. Investors may assume that a company with an earnings yield of over 11%, during these times when investors increasingly undertake greater risks for yield, must be trading at a significant premium to the value of its assets. NWLI is actually trading at a significant discount to the value of its assets.
Assets at a Discount
The table below depicts the company's shareholder equity and share count over the past decade.
Shareholder equity (NASDAQ:BV)
BV per share
Class A shares Outstanding
Class B shares Outstanding
Total shares Outstanding
In addition to consistency of earnings, NWLI has managed to grow its book value by over 7% in the past decade. They have achieved these results in a challenging economic environment without taking on debt or significantly diluting shareholders.
In the past nine years the company has earned $757,605. During the same period shareholder equity has increased by $768,090. This means that NWLI has turned its earnings into shareholder wealth. But an astute investor must ensure that the numbers also hold on a per share basis since many companies destroy shareholder value through dilution. On a per share basis, the company has earned $214.18 over the past nine years while growing BV per share by a comparable amount of $206.67. Hence dilution has played little role.
What is the fair value of NWLI? The company's book value is about $398 and EPS is $27.19. At the current stock price, NWLI is trading at less than 60% of its book value and PE of less than 9. For a company of this caliber a 20% premium to book value is not unreasonable. In fact I would gladly hold these shares if the stock price rose to that level. A 20% premium to book value would be a stock price of about $478, and since the stock price is around $240 now, NWLI has a 100% price appreciation potential.
When will investors get their two marshmallows? Who knows, but NWLI continues to increase its shareholder equity as we wait for Mr. Market to catch up. Mispricing is more prevalent when companies' stock is tightly held. The Moodys have little interest in managing the stock price and are correctly focused on running the business. Management's long-term focus may not suit many mutual fund managers, hedge funds, and institutional investors who often seek dividend yields and short-term gains. This creates a major opportunity for patient individual investors who understand the true value of this company.
In the past, I have argued that some companies hoard cash unnecessarily and destroy shareholder value. I believe NWLI is more like Berkshire Hathaway (NYSE:BRK.A). I am happy to let both these companies retain their earnings since they have done phenomenally at utilizing those earnings historically. As an added benefit shareholders of these companies can defer their tax bill into the future.
NWLI is not a micro-cap but given its high insider ownership and low float, it trades like one. Average trading volume is less than 5000 shares or about $1 million daily. Institutional investors cannot accumulate a meaningful position in the company despite NWLI's over $800 million market cap. It takes patience and use of limit orders for individual investors to acquire this stock. In addition, investors who have a limited time frame may be disappointed in their short term returns since management cares little if the stock remains undervalued. There is no catalyst for change in control of this company or a sale. Hence NWLI may remain undervalued for a prolonged period. As a long-term investor, I am content with this situation since I am confident that the Moodys will continue growing shareholder equity at a reasonable rate as they have done for the past fifty years. NWLI investors may not get their marshmallows now, but with enough patience the future may promise an even better treat: S'Mores!
Disclosure: I am long NWLI, MSFT, BRK.A, GENC, DSWL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.