Do Not Take Your Profits On Globe Life, Even At Its All-Time Highs

Summary

• Globe Life has consistently outperformed the market and offers reliable growth.
• The company has a strong business model, with consistent earnings growth and a robust performance record.
• Globe Life is trading at only 10.3 times its expected earnings in 2024.

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I first recommended buying Globe Life (NYSE:GL) about 12 years ago. Since that article, the stock has outperformed the broad market by a wide margin, as it has rallied 248% whereas the S&P has rallied 214%. Since my first article on Globe Life, I have reiterated my bullish thesis several times, mostly thanks to the exemplary management of the company and its reliable growth trajectory. About five months ago, I stated that Globe Life had become particularly undervalued due to its 10% correction since the beginning of the year. Since that article, the stock has rallied 12% (vs. +4% of the S&P 500) and thus it has returned close to its all-time highs. Nevertheless, the stock remains attractively valued. Therefore, investors should not rush to take their profits from this high-quality insurance stock.

Business overview

Through its subsidiaries, Globe Life offers a great variety of life and health insurance products to lower middle to middle income households throughout the United States. The company generates 70% of its total premium revenue and 75% of its total underwriting profit from its life insurance business.

A consistent growth record is one of the most important features investors should look for when they try to identify stocks for their portfolios. Globe Life has an enviably consistent performance record. To be sure, the insurer has grown its earnings per share every single year over the last nine years, with the exception of essentially flat earnings per share in 2020 due to the coronavirus crisis. As the pandemic caused a steep increase in life insurance claims, the flat bottom line of Globe Life in that fierce downturn is a testament to its robust business model, which results from the disciplined underwriting policy of the company. Since 2013, Globe Life has grown its earnings per share at a 7.9% average annual rate. This growth rate combined with the consistent performance confirms the high-quality business model of the insurer.

Moreover, there are absolutely no signs of fatigue on the horizon. In the most recent quarter, Globe Life grew its life premiums 6% and its underwriting margin 8% over the prior year’s quarter. The number of active agents increased 16% over the prior year’s quarter and 5% sequentially. Thanks to its solid business performance, the insurer grew its book value per share 11% and raised its guidance for its earnings per share this year from $10.37-$10.57 to $10.49-$10.65. As management has repeatedly proved reliable and somewhat conservative in its guidance for several years, analysts expect Globe Life to grow its earnings per share 30% this year, from $8.15 in 2022 to $10.58.

The impressive performance has resulted not only from the strong growth of the sales of insurance products but also from the high growth of the net investment income of the company. While indebted companies suffer from the surge of interest rates to 16-year highs, Globe Life greatly benefits from this development, as it invests its float (i.e., its incoming premiums) at excessive yields.

During the third quarter, Globe Life took advantage of high-yield municipal bonds and invested its float at an average yield of 6.15% and an average rating of A+. As the total yield of its portfolio, which consists primarily of old investments at lower yields, is 5.23%, it is evident that the company is in the process of growing its investment income via two drivers; a greater investment portfolio (thanks to new premiums) and a higher yield. As per its latest guidance, Globe Life expects to invest about $1.1 billion in bonds with an average yield of 5.9% and $310 million in commercial mortgage loans with an average yield of 8.3% in 2023.

It is also important to note that Globe Life is well known for its conservative investment policy. About half of its investment portfolio has a credit rating of A and the other half has a credit rating of BBB. In addition, the company has no exposure to risky assets, such as derivatives, common stocks, and residential mortgages.

Some regional banks came under great pressure earlier this year due to the aggressive interest rate hikes implemented by the Fed. The surge in interest rates caused excessive losses in the bond portfolio of these banks. Globe Life currently has $2.6 billion of losses in its bond portfolio due to the impact of 16-year high interest rates on the mark-to-market value of bonds. However, these are only paper losses, as the company intends, as always, to hold all its bonds until they mature. Therefore, the decrease in the mark-to-market value of the bond portfolio of Globe Life is only temporary in nature.

Thanks to the unabated momentum of its insurance business and the strong tailwind from rising investment income amid high interest rates, Globe Life recently provided positive guidance for 2024. It expects to achieve all-time high earnings per share of $11.00-$11.60 in 2024, thus implying 7% growth at the mid-point. Analysts are well aware of the cautiousness of management in its guidance and thus they expect the company to post earnings per share of $11.44 next year, towards the upper end of the guidance. They also expect Globe Life to grow its earnings per share by another 7% per year in 2025 and 2026.

Valuation

Globe Life is currently trading at only 11.2 times its expected earnings this year and 10.3 times its expected earnings in 2024. These earnings multiples are much lower than the 10-year average price-to-earnings ratio of 13.0 of the stock. Notably, the stock is also trading at only 9.0 times its expected earnings in 2026.

The cheap valuation of Globe Life may be attributed to the impact of 16-year high interest rates on the present value of future earnings. Whenever interest rates begin to moderate, the valuation of Globe Life is likely to revert towards its historical average. Therefore, the stock will have significant upside potential thanks to the normalization of its valuation whenever interest rates deflate.

Of course, it has proved impossible to forecast when the Fed will begin reducing interest rates. On the other hand, thanks to the aggressive policy of the central bank, inflation has steadily decreased, from a 40-year high of 9.2% in June 2022 to 3.2% now. Whenever inflation falls in the target range of 2.0%-2.5% of the Fed, the central bank is likely to begin lowering interest rates. Overall, one can reasonably expect interest rates to begin to decline at some point in 2024 or 2025. When that happens, Globe Life will probably enjoy a valuation tailwind.

Risks

If inflation proves much stickier than currently anticipated, interest rates will probably remain elevated for much longer than expected. In such a case, the valuation of Globe Life is likely to remain suppressed. Nevertheless, even in such an adverse scenario, Globe Life will continue investing its float at high yields and hence it is likely to keep growing its earnings meaningfully.

The most adverse scenario for Globe Life is the event of a severe recession. In such a case, interest rates will deflate but the valuation of the stock may remain under pressure due to negative market sentiment. In addition, the growth of premiums sold may stall while the company will be forced to invest its float at much lower yields than the current yields of high-quality bonds.

On the other hand, there are no signs of a severe recession on the horizon. In fact, the Fed has been doing its best since early last year to cool the economy. Moreover, Globe Life has repeatedly proved resilient to recessions. Even in the Great Recession, which was the worst financial crisis of the last 90 years, and the pandemic, the company did not incur a material decrease in its earnings. Overall, the stock of Globe Life may temporarily come under pressure in the event of a recession but the company is likely to prove resilient, as it has always been.

Final thoughts

When a stock rallies and approaches its all-time highs, some investors are tempted to take their profits. However, despite its 11% rally since early October, Globe Life remains attractively valued. In addition, the buy-and-hold strategy has proved highly rewarding with this exemplary insurance company. Therefore, investors should not rush to take their profits.