The insurance industry may not be as recession resistant as food or certain consumer goods, but demand for insurance products still tends to remain relatively resilient even when the economy struggles as people still want ways to reduce their risk levels. Some insurance products are legally required, like auto insurance, and others may become even more important in a weaker economy, such as life and health insurance.
However, having some resistance to a potential recession does not mean insurance companies are completely immune. Thus, using the GuruFocus All-in-One Screener, I searched the market for insurance stocks that are trading below GF Value while offering a dividend yield of at least 2.5%. These characteristics should provide a margin of safety, granted the companies can survive tough conditions, avoid losing market share and continue growing in the long run.
Let’s take a look at some of the top results of this screen to assess whether they could represent value opportunities, or whether investors might be better off looking elsewhere.
MetLife Inc. (MET) is the largest life insurance company in the U.S. It also offers retirement solutions, employee benefits, auto, home, dental insurance and more. MetLife is known for conducting extensive industry research, most notably its annual U.S. Employee Befits Trends Study.
Founded way back in 1868, MetLife has grown to have over 90 million customers in more than 60 countries around the world, so it is safe to say the company knows a thing or two about surviving recessions. It maintains a well-diversified investment portfolio, which includes public credit, private credit, mortgage loans and more. Top- and bottom-line growth has been slow but steady over the years.
As of May 9, shares of MetLife traded around $52.96 for a price-earnings ratio of 23.87. Based on Morningstar (MORN) analysts’ estimates, the forward price-earnings ratio is 6.52. The GF Value chart rates the stock as modestly undervalued.
MetLife’s dividend yield of 3.81% is more than twice the S&P 500’s dividend yield of 1.65%, and impressively, there has not been a dividend cut in more than 20 years, not even during the financial crisis. The company also returns cash to shareholders via stock buybacks when it can; the three-year share buyback ratio is even higher than the dividend yield at 5.2%.
Overall, MetLife looks to be a true stalwart of the insurance industry. Growth likely will not be too impressive, but management seems dedicated to returning cash to shareholders via dividends and buybacks.
CNO Financial Group
CNO Financial Group Inc. (CNO) provides life insurance, annuity and supplemental health insurance to approximately 4 million customers exclusively in the United States, stating that its mission is to “ensure the future of middle-income America.”
For U.S.-focused investors who want to reduce downside risk, this stock could be worth consideration. Not only does it eliminate potential geopolitical risks, the company also invests primarily in investment-grade corporate bonds, which make up nearly half of its investment portfolio. Together with government bonds and a small percentage (2.2%) of high-yield corporate bonds, CNO Financial boasts that 61% of its portfolio is in bonds, providing high liquidity. The top line is still growing despite adverse economic conditions, though the bottom line has suffered near-term pressure.
On Tuesday, shares of CNO Financial traded around $21.34 for a price-earnings ratio of 8.78. Based on Morningstar (MORN) analysts’ estimates, the forward price-earnings ratio is 7.92. The GF Value chart rates the stock as modestly undervalued.
The company’s dividend yield is decent at 2.58%. It did not pay a dividend during the financial crisis, so it is tough to assess CNO Financial’s long-term dedication to shareholder returns, but it has been aggressively hiking the dividend ever since it started paying one, recording an annualized dividend growth rate of 8.6% over the past three years. The company also returns cash to shareholders via stock buybacks, boasting a three-year share buyback ratio of 8.3%.
CNO Financial may be a small company compared to the likes of MetLife, but it has built itself a niche investment case by focusing on doing business in its home country and keeping more than half of its investment portfolio in bonds.
Prudential Financial Inc. (PRU) is an insurance company that also provides retirement planning, investment management and other financial products and services to both retail and institutional customers in the U.S. and more than 40 other countries.
This company has been the subject of some controversies. For example, it got caught up in the Wells Fargo (WFC) scandal, with allegations that Wells Fargo customers were sold Prudential insurance products that they did not want. However, it has managed to grow steadily regardless. Prudential differs form the other two companies on this list because, rather than playing it safe, it focuses its investments on growth markets and businesses, including expansion efforts in Brazil. The company maintains that it can remain stable in a variety of economic scenarios, though its earnings history shows high volatility.
Shares of Prudential traded around $81.97 on May 9 with a price-earnings ratio of 56.14 and a forward price-earnings ratio of 6.65, reflecting turnaround potential according to analysts. The GF Value chart rates the stock as modestly undervalued.
Prudential’s dividend yield is an incredible 5.93%. Investors should beware that the company did slash its dividend during the financial crisis, but the payout recovered in three years and continued on to new heights. The company’s three-year share buyback ratio is 2.8%.
Prudential’s struggles with profitability amid the rising interest rate environment could provide a value opportunity if it can recover, especially since the plunging stock price has provided a dividend yield that is far above average. However, such struggles could indicate the stock is at a higher risk as the U.S. continues its struggle against inflation. The aggressive expansion efforts will likely create a higher-risk, higher-reward scenario.
Originally published on GuruFocus.com