Globe Life Has Become Undervalued Again

Summary

• Globe Life is thriving, as the COVID-related claims have plunged and the insurer invests its float at multi-year high yields thanks to the surge of interest rates.
• GL has grown its earnings per share every single year over the last decade, except for 0.1% dip in 2020 due to the pandemic.
• GL is expected to grow its earnings per share by 27.5% this year, to a new all-time high, and is trading at a forward price-to-earnings ratio of only 10.3.

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I first recommended purchasing Globe Life (NYSE:GL) in 2012. Since my article, the stock has outperformed the S&P 500 by a wide margin, as it has offered a total return of 239%, whereas the index has rallied 203%. In my latest article on this high-quality insurance company, I stated that the stock remained reasonably valued, despite its vast outperformance vs. the S&P 500 since late 2020. Since that article, the stock has shed 10% and thus it has become remarkably cheaply valued, even though it has bright prospects ahead. In this article, I will analyze why Globe Life is likely to highly reward investors off its current stock price.

Business overview

Through its subsidiaries, Globe Life provides various life and supplemental health insurance products to lower middle to middle income households in the United States. The life insurance division generates 71% of total premium revenue while the health insurance division generates the remaining 29% of total premium revenue.

Globe Life is a well-managed company with a consistent growth record, which is particularly important in the insurance industry. Globe Life has grown its earnings per share every single year over the last decade, except for a minor dip (-0.1%) in 2020 due to the impact of the coronavirus crisis, at an average annual rate of 7.9%. This exceptional record speaks to the resilience of the company to downturns and its disciplined underwriting policy.

In the insurance business, maintaining a consistent growth record is crucial, as it demonstrates the ability to navigate both favorable and adverse market conditions. Some insurers may resort to reducing premiums to attract customers and gain market share, but this strategy usually backfires during challenging years, in which a high number of claims results in material losses. In contrast, the reliable earnings growth trajectory of Globe Life is a testament to the company’s disciplined underwriting policy, which ensures long-term profitability and stability.

The endorsement of Globe Life by Berkshire Hathaway, with its significant stake (6%) in the company, further emphasizes the quality of management and the potential of the company. Berkshire Hathaway is known for its careful investment decisions and long-term perspective and hence its long-term investment in Globe Life (for nearly two decades) suggests confidence in the prospects of the company.

Not only does Globe Life have an exceptional growth record, but it also enjoys positive business momentum right now. In the first quarter, the company grew its operating earnings per share 49% over the prior year’s quarter, from $1.70 to $2.53. Excluding the unrealized gains from its investments, the company posted a return on equity of 14.6% and 10% growth of its book value per share.

Globe Life currently enjoys two strong business tailwinds, which are the keys behind the strong results of the first quarter. First of all, now that the pandemic has subsided, Globe Life enjoys a steep decrease in the number of claims related to COVID mortality. In addition, after a whole decade of near record-low interest rates, the Fed has raised interest rates to multi-year highs in an effort to restore inflation to its long-term target. The surge of interest rates greatly benefits Globe Life, as the company is now able to invest the premiums it collects at much higher yields than it could throughout the last decade. Indeed, in the first quarter, Globe Life reported a 5% increase in its investment income and stated that it expects this growth rate to persist for the whole year.

Some investors may be worried about the short-term impact of high interest rates on the current value of the investment portfolio of Globe Life. Indeed, the fixed maturity investment portfolio of the insurer has a net unrealized loss of $1.3 billion due to the surge of interest rates. However, it is critical to realize that these are only paper losses. To be sure, the company recently stated that it is not concerned about the unrealized loss position, as it intends to hold the investments to maturity. Management also expects to invest approximately $1 billion in fixed maturities at an average yield of 5.6% this year.

Analysts seem to agree on the promising growth prospects of Globe Life. They expect the company to grow its earnings per share by 27.5% this year, from an all-time high of $8.15 in 2022 to a new all-time high of $10.39 this year. They also expect Globe Life to grow its earnings per share by about 8% per year on average beyond this year, from $10.39 this year to $13.15 in 2026. Overall, the past, the present and the future look bright for this high-quality insurance company, whose management has proved exemplary over the long term.

Valuation

Globe Life is currently trading at a forward price-to-earnings ratio of only 10.3. This earnings multiple is much lower than the 10-year average price-to-earnings ratio of 13.0 of the stock. It is also important to note that the stock is trading at only 8.1 times its expected earnings in 2026.

The cheap valuation has resulted primarily from high interest rates, which have reduced the present value of future earnings, and the sell-off of most financial stocks, which has been caused by the collapse of Silicon Valley Bank, Credit Suisse and First Republic. However, these valuation headwinds are likely to abate in the upcoming years. Inflation has declined every single month since it peaked a year ago, and thus it has dropped from its peak of 9.1% to 4.0%. As soon as it reverts to the target range of the Fed (2.0%-2.5%), the central bank is likely to begin lowering interest rates. Moreover, Globe Life has proved resilient even under the fiercest downturns of the financial sector, such as the Great Recession and the pandemic, and hence it is likely to endure the ongoing financial turmoil without any problem.

As soon as the market sentiment becomes normal and interest rates begin to moderate, the stock of Globe Life is likely to revert to its average valuation level. Therefore, the stock has great upside potential (26% = 13/10.3 – 1) merely thanks to a normalization of its valuation.

Risks

A potential risk factor is the adverse scenario of persistent inflation beyond this year. In such a case, the valuation of Globe Life is likely to remain under pressure for a prolonged period. On the other hand, even in this scenario, the company is likely to keep thriving, as it will continue investing its float at high yields. In other words, Globe Life is somewhat hedged against this negative scenario.

Another risk factor is the event of a severe recession. In such a case, Globe Life may experience a decrease in the demand for its insurance products. While the company is not immune to severe recessions, it has proved resilient during rough economic periods, even during the Great Recession, in which it incurred a minor decrease in its earnings per share. Overall, Globe Life may face some short-term headwinds but its business model has proved robust in the long run.

Final thoughts

The stock of Globe Life has traded range-bound over the last eight months. Such consolidation periods usually make some investors lose their patience, especially given the boring business model of Globe Life. However, it is critical to realize that this high-quality insurer has always offered excessive long-term returns after such consolidation periods. Thanks to its markedly cheap valuation level, Globe Life is likely to repeat this pattern once again.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.