Hello and welcome to the seventh edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.

Today’s dividend stock recommendation is a 175-year-old company. This company has consistently increased its dividends over the past 14 years, and also returned capital to investors through generous buybacks. The stock of the company we are recommending is an outlier in its industry, displaying an outstanding performance versus its peers while remaining undervalued.

But first, let’s delve into a short update on the macro and market developments.

 

Macro & Markets: Price/Performance Matters

After a stellar first half of the year, the U.S. stock markets appear to be experiencing “rally fatigue,” responding negatively to various economic news. Market participants have finally realized that the Federal Reserve plans to make good on its promise to do whatever it takes to bring down inflation – and that it means there will be no rate cuts soon. With investors rushing to price in two additional interest rate hikes this year, it’s no wonder that stocks have wobbled.

The anticipation of the earnings season’s start also weighs on investor sentiment, with FactSet predicting a 6.8% year-on-year decline in earnings for the S&P 500 (SPX) companies. If the companies’ actual results support the outlook, this will mark the steepest decline since the onset of the COVID-19 pandemic. While in Q1 2023 the actual earnings were much better than forecasted, giving hope that the second quarter’s earnings will also defy grim expectations, FactSet bases its outlook on companies’ own forward guidance. Of all U.S. companies that have issued financial results outlook for Q2 2023, 67% issued negative guidance, affirming the analysts’ pessimism towards the coming earnings season.

One week’s decline after a strong multi-week rally couldn’t have dented sky-high valuations, which put richly valued stocks in a vulnerable position. While the doom and gloom forecasts may well prove wrong, as they mostly did in this cycle, we prefer not to take chances. While we won’t compromise on quality and dividends, we believe that it’s wise in the current environment to choose stocks trading at lower-than-average valuations compared to their peers.

 

Quality Dividend Stock – This Week’s Top Pick

Unum Group (UNM) and its subsidiaries offer financial protection solutions in the U.S., the U.K., and Poland. The company offers group long-term and short-term disability, group life, and accidental death and dismemberment products; supplemental and voluntary products, such as individual disability, voluntary benefits, and dental and vision products; and accident, sickness, disability, life, and cancer and critical illness products. It also provides group pensions, individual life and corporate-owned life insurance, reinsurance pools and management operations, and other miscellaneous products.

Unum sells its products primarily to employers for the benefit of employees, working mainly through field sales personnel, independent brokers, consultants, and independent contractor agency sales force. The company is a leading provider of disability income insurance and ranks among the world’s leading special risk insurers. Unum has a strong market share in the U.S. and the U.K.

UNM operates through three divisions: Unum U.S., which accounts for about two-thirds of overall sales; Unum International; and Colonial Life, also serving the U.S. population. Colonial Life was merged into Unum in 1993 and still operates as a separate unit. Unum also operates a “Closed Block” segment, consisting of long-term care and other insurance products no longer actively marketed, but for which the company still receives premiums.

With a market capitalization of $9.7 billion, Unum is a mid-cap company, bordering on large-cap. UNM is a Fortune 500 company and is also included in the list of the 2023 World’s Most Ethical Companies. It has more than 10,000 employees in the U.S. and abroad; it offers insurance to 40 million people around the world. The company’s insurance products are used by a third of Fortune 500 employers in the U.S. In 2022, Unum reported revenues of about $12 billion and paid $8 billion in benefits.

The company, originally incorporated as Union Mutual in 1848, changed its name to Unum in 1986. The company entered the U.K. market in 1990 and the Polish market in 2018. Unum has been publicly traded on NYSE since 1986. The company belongs to the Financial Sector (Industry: Insurance).

Unum has been paying dividends since 1999 and has consistently raised them since 2009. Over the past five years, the payouts have increased at a compound annual growth rate (CAGR) of 7.5%. The latest such increase was in May 2023, when the company raised its payout by 10.6% starting in the third quarter of 2023. The company’s dividend yield of 2.7% is higher than the Insurance industry’s average of 2.1%.

With a low payout ratio of 19.6%, UNM’s dividend payments are comfortably covered by earnings. This payout ratio is more than sustainable and, coupled with the company’s sound finances and favorable outlook, allows for continued strong dividend growth going forward.

In addition to dividends, Unum returns capital to its shareholders through generous stock buybacks. Last year, the approved share repurchase program for 2023 was targeted on buybacks ranging from $250 to $275 million; in May this year, the company’s management announced plans to expand the program in H2, bringing total repurchases to $300 million.

Unum is a financially healthy company with high profitability metrics. It has a low debt-to-equity ratio of 22%; its debt is well-covered by operating cash flow, while interest payments on its debt are well-covered by EBIT. As for its capital efficiency, the Return on Equity (ROE) of 14.3% may seem mediocre, but it’s more than twice the average for the industry; the same can be said about its Return on Assets (ROA). UNM is a stable and profitable business. Its net profit margin of 12% and operating margin of 16% are both twice the average for the company’s peers in the industry.

UNM has a track record of surpassing analysts’ estimates. In Q1 2023, the company reported earnings that exceeded expectations (although revenue was in line with estimates) and also raised its full-year 2023 guidance. Q1 EPS rose 37.5% year-on-year, a fifth consecutive high double-digit quarterly increase. Net income surged 41% year-on-year. Over the last three years, Unum’s earnings per share have increased by 16% per year on average.

Better-than-average financial metrics are reflected in Unum’s stock performance in recent quarters. While UNM’s five-year increase of 30.1% is similar to that of the industry, as represented by the SPDR S&P Insurance ETF (KIE), in shorter periods UNM leaves its peers in the dust. In the past three years, the stock has surged 198% versus KIE’s 52% increase; in the past 12 months, UNUM stock has brought its investors a profit of 46%, while the broad ETF has risen by 8%. This year, UNM, like all financials, tumbled in March on the back of the banking crisis. However, it rebounded much faster and stronger than its peers, rising 21.8% year-to-date, while KIE remained flat for the year.

Despite the outstanding performance, Unum’s stock has remained undervalued versus its peers in the industry, the broad financial sector, and its fair value. UNM’s TTM P/E of 6.9 and Forward P/E of 6.7 present a 25% discount to the financial sector’s averages and are significantly lower than the Insurance industry averages.

Stocks in the insurance industry are typically not high growth; they are solid investments known more for their value and/or income potential. While it’s unrealistic to expect that Unum’s stock will continue surging in the next years, analysts see a material upside of above 5% on average in the next 12 months. Analysts differ in their assessment: while Credit Suisse predicts an upside of just 2%, Wells Fargo sees an 18% rally ahead. In any case, UNM’s shareholders will certainly benefit from increasing dividends in the years to come.

Unum is rated 9/10 (“Outperform”) by TipRanks’ Smart Score system with a “Moderate Buy” recommendation:

The company’s low valuation, high and rising dividends, strong financial position, and strong EPS results make it an attractive investment. While analysts anticipate only a moderate increase in the stock price over the next year, technical indicators suggest an upward trend. If the company continues to exceed financial forecasts, we believe the stock has the potential to outperform its sector. We are confident that UNM should be included in the income investment portfolios.

 

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• Category: Dividend