by dum_townerino
TLDR: Long UNM – hold for long term. Collect $1.14 per share in dividends (5.45% yield) and target long term capital gain of 82% within a year (based on my price target of $38)
My positions: Over the last few weeks I have been accumulating shares on any dips – I own 40k shares at an average price of $17.22 (currently have an unrealized capital gain of 21%). I plan on holding for more than a year to collect the juicy dividend, get favorable tax treatment, and significant capital gains based on returning to pre-COVID stock price level.
Company Background
Stock Price (11/13 close): $20.88
Market Capitalization: $4.25B
Annual Dividend: $1.14 per share (5.45%)
WARNING: This is a boomer stock. This is not a pre-revenue EV stock valued based on stolen graphic design renderings. This is not a SPAC pump and dump or a pre-revenue tech company. I realize this is going to be outside the wheelhouse of the short attention span of most WSB players. But I think this is also a long-term lock for big gains with little risk and these asymmetric risks are ideal for long term candidates.
Unum (UNM) is a Fortune 500 insurance company based in Chattanooga, TN. They primarily sell group disability and life insurance to other companies in the US and UK. 182k businesses get insurance through UNM – including one in three Fortune 500 companies. They also offer other insurance policies like accident, critical illness, dental, and vision (and historically offered Long Term Care Insurance).
Below is a historical financial summary (numbers from SA):
| $ in millions | 2015 | 2016 | 2017 | 2018 | 2019 | TTM |
|---|---|---|---|---|---|---|
| Revenues | 10,731.3 | 11,046.5 | 11,286.8 | 11,598.5 | 11,998.9 | 11,923.2 |
| EBITDA | 1,490.6 | 1,615.4 | 1,667.3 | 896.5 | 1,696.9 | 1,521.1 |
| Basic EPS | $3.51 | $3.96 | $4.39 | $2.38 | $5.25 | $4.67 |
Investment Thesis
- Strong revenue and earnings even during COVID – for the third quarter of 2020, UNM reported net income of $231.1 million ($1.13 per share), compared to net income of $242.0 million ($1.16 per share) for the third quarter of 2019. COVID had a give and take impact on the business – they collect less premiums when employment goes down but COVID also lead to lower claims in some lines of business like their dental and vision insurance as people put off care. There was elevated mortality which lead to higher claims on their life insurance business. But overall, their earnings have seen little impact from COVID while their share price has been completely hammered.
- Valuation – this stock is insanely cheap. In February 2020 (immediately pre-COVID), the stock was trading close to $30. Current PE ratio (TTM) is 4.47. Per the third quarter results, book value per common share is now up to $53.50 (14.6 percent growth compared to the year-ago quarter). It is trading at less than 50% of book value.
- Dividend Yield – current dividend is $1.14 per share (5.45% dividend yield). The dividend has been growing for the last 12 years. The 10 year dividend CAGR is 13.22%. Current payout ratio is under 23% so the dividend is about as safe as it gets.
- Share buy-backs – in the past, the Board has authorized massive share repurchases. In May 2019, they authorized $750m of share repurchases. In 2019, they repurchased 12.3 million shares for $400.4 million. This was suspended during COVID, but it shows an appetite for buying back shares and that management thought the company was undervalued even in May 2019 when it was trading at $36 per share.
- Technicals – the stock is currently trading near historic support areas with limited downside, significant support, and lots of room for upside.
Headwinds
Investors have primarily criticized UNM for the increases to reserves in the closed block Long Term Care (LTC) business. I think the market is putting too much emphasis on this business – and as morbid as it sounds, COVID is actually helping the Company here.
In the past, UNM tried to make a profit on LTC insurance and failed like many other insurers. They made bad assumptions on lapse rates and longevity which has cost them a lot of money – these policies are incredibly unprofitable now that people survive a long time in assisted living facilities and nursing homes. In 2009 they closed the individual LTC business and in 2012 they closed the group business. Even though the block has been closed, they have repeatedly dumped more money to increase their reserves. Earlier this year, the Company came to an agreement with insurance regulators in Maine to add $2.1b in reserves over the next 7 years. However, COVID seems to have had a favorable impact on the closed-block business (though they won’t explicitly say this on earnings calls). A lot of the COVID deaths have happened in nursing homes which have led to increased mortality and therefore lower benefit payments. You can see this in their third quarter results:
As reported in the third quarter results, the Closed Block segment reported adjusted operating income of $70.8 million in the third quarter of 2020, an increase of 163.2 percent from $26.9 million in the third quarter of 2019. The interest adjusted loss ratio for the long-term care line of business was 67.4 percent in the third quarter of 2020, compared to an interest adjusted loss ratio of 89.8 percent in the third quarter of 2019, driven primarily by higher claimant mortality.
EDIT: Imgur link with position proof
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.