Lincoln National Corporation: 30% Upside With A 4.7% Yield

Summary

• Lincoln National Corporation has seen its share of challenges from COVID-19. However, I see the risks as being more than priced in.
• I expect to see a sequential increase in Q3 EPS, and see long-term earnings accretion from the cost-saving initiatives.
• The shares appear to be deeply undervalued at present, and I find the 4.7% yield to be attractive in this low-rate environment.

Lincoln National Corporation (NYSE:LNC) continues to be a beaten-down financial stock. Since the start of the year, the shares have traded down by 43%, as fears and concerns over the pandemic still linger. However, I believe that the stock has fallen too far, and that the risks are more than priced in. In this article, I evaluate what makes this stock an attractive investment at the current valuation; so let’s get started.

A Look Into Lincoln National Corporation

Lincoln National Corporation is a financial services company that provides life insurance, annuities, and retirement plan services. It was founded over a century ago, in 1905, with the endorsement of Abraham Lincoln’s son, Robert Todd Lincoln. Today, it is ranked #188 on the Fortune 500 list by revenue and #22 by assets, and serves over 17 million customers. In 2019, the company generated over $17B in total revenue.

COVID-19 has undoubtedly been challenging for the company, as claims related to the pandemic reduced earnings by $0.65 to $0.75 per share in the latest quarter. EPS in the latest quarter was $0.97, which represents a 59% YoY decline. Management estimates that for every 10,000 COVID-19 deaths, the company should expect a $10 million hit to earnings.

Looking into this morbid financial statistic, I wanted to calculate what LNC’s EPS hit may look like for the third quarter that just ended. Using the red line in the CDC graph below, I estimate the average number of daily COVID-19-related deaths to be 850 for the months July through September.

(Source: CDC)

When multiplied by the 92 days in the quarter, I arrive at an estimated 78,200 COVID-19-related deaths during Q3 alone. Applying management’s $10M per 10K deaths estimate, this comes out to an earnings hit of $78.2M. Then, dividing the $78.2M by the 193.2M total current shares outstanding, I arrive at a $0.40 YoY hit

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.