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Almost two years ago, I recommended purchasing Globe Life Inc. (NYSE:GL) for its 35% potential upside within a period of two years. The stock reached my target price this week. More importantly, it has rallied 19% this year, and thus it has outperformed the broad market by an impressive margin, as the S&P 500 has declined 22% during this period. The big question is whether investors should take their profits on Globe Life or the stock remains attractively valued.
Business overview
Globe Life is a life and health insurance company. The division of life insurance generates 70% of the total revenue of the company, while health insurance generates the remaining 30%. Globe Life has a mundane business model, and thus it passes under the radar of the vast majority of investors.
However, it is an exceptionally well-managed insurer, with a remarkably consistent growth record. To be sure, Globe Life has grown its earnings per share every single year over the last decade, except for 2020, when the company posted a 1% decrease in its bottom line due to the pandemic. A 1% decrease in earnings during a fierce downturn, which caused a severe recession and an abnormally high number of deaths and insurance claims, is undoubtedly benign. During the last decade, Globe Life has grown its earnings per share at an 8.0% average annual rate.
Insurance is an especially tricky business, as short-term results may provide a misleading picture for an insurer. Some insurers lower their prices in order to gain market share from their competitors. During favorable years, with few claims, these insurers may exhibit strong performance. However, in an adverse year, with a great number of claims, these insurers incur material losses. Therefore, investors should pay great attention to the long-term performance of insurance stocks to make sure that these companies follow a disciplined underwriting policy. The aforementioned growth record of Globe Life is a testament to its exemplary management and helps explain why Berkshire Hathaway (BRK.A)(BRK.B) has been the largest shareholder of Globe Life, with a 6% stake, for more than a decade.
As mentioned above, Globe Life was negatively affected by the pandemic, which caused an abnormally high number of life insurance claims. However, thanks to its prudent underwriting policy, the company endured this unexpected downturn. Even better, the insurer is now recovering strongly from the pandemic.
In the most recent quarter, Globe Life grew its net life sales by 16% over the prior year’s quarter, thanks to a great improvement in the average productivity per agent. In addition, health premiums and health underwriting margins grew 7% and 9%, respectively. As a result, Globe Life grew its net operating income per share by 12%, from $1.85 to $2.07, and exceeded the analysts’ consensus by $0.02.
Even better, Globe Life is currently facing a strong tailwind, namely the aggressive interest rate hikes implemented by the Fed. The central bank is doing its best to cool the economy in an effort to restore inflation to its long-term target of 2%. As the risk of an upcoming recession has greatly increased, the policy of the central bank is likely to provide a headwind to most companies. However, the opposite is true for Globe Life.
The insurer has seen its investment income decline for three consecutive years due to the extremely low interest rates that have prevailed throughout this period. Now that the Fed has begun to raise interest rates at a fast pace, Globe Life will be able to invest the premiums it receives from its customers in securities with higher yields. In the latest conference call, management stated that the yield of the investment portfolio rose (marginally) in the second quarter for the first time in six years. As interest rates have risen significantly since the second quarter and are expected to rise even more in the upcoming meetings of the Fed, Globe Life is likely to enjoy a strong tailwind in its earnings. It is also worth noting that Globe Life has no exposure to Russia or Ukraine via its investment portfolio.
Analysts seem to agree on the bright prospects of Globe Life, as they expect the company to grow its earnings per share by 17% this year, by another 17% next year and by 9% in 2024. Given the strong business momentum in its insurance business and the strong positive effect of rising interest rates on its investment income, the company is likely to meet or exceed the analysts’ estimates.
Hedge to inflation
Inflation has skyrocketed to a 40-year high this year due to the unprecedented fiscal stimulus packages offered by the government in response to the pandemic and the ongoing war in Ukraine. Even worse, inflation was initially considered transitory by the Fed, but it has persisted for much longer than initially expected. Excessive inflation has greatly increased the costs of most companies, and thus it has caused a steep decrease in their operating margins.
Globe Life is a bright exception to this rule. It has significantly increased its insurance premiums and thus it has offset the negative effect of inflation on its costs. Moreover, as long as inflation remains high, interest rates will remain high, and thus they will greatly benefit the investment income of Globe Life. In other words, in the adverse scenario of persistently high inflation for several more quarters, Globe Life is likely to provide a safe haven to investors thanks to its rising investment income. The vast outperformance of the stock this year (+19% vs. -22% of the S&P 500) is a testament to the resilience of this high-quality insurer in the highly inflationary environment prevailing right now.
Valuation
Despite its remarkable rally this year, Globe Life remains reasonably valued. To be sure, the stock is currently trading at a price-to-earnings ratio of 14.0. It is also trading at 12.0 times its expected earnings in 2023 and 11.0 times its expected earnings in 2024. Given also its consistent growth record and its reliable performance, the stock is not overvalued by any means.
The only caveat is the steep rally of the stock to its current all-time high. Due to this steep rally, the stock is likely to go through a period of consolidation, and hence it is suitable only for investors determined to hold the stock for years. Globe Life is actually an ideal buy-and-hold-forever stock. I first recommended purchasing it a decade ago. Since then, the stock has more than tripled and thus it has outperformed the S&P 500 by a wide margin (+235% vs. +161%). The vote of confidence of Warren Buffett for more than a decade is just another testament to the exceptional quality and reliable growth trajectory of this insurer.
Risk
Just like almost every stock in the investing universe, Globe Life has some risks. If the aggressive policy of the Fed causes a severe recession, it will negatively affect the insurance business of Globe Life. In such an adverse scenario, the stock price of Globe Life is likely to come under pressure, along with the broad market. On the bright side, the company has endured several downturns and has always emerged stronger from them.
The other risk factor is a potential swift reversion of inflation to its long-term average of about 2%. In such a case, the Fed may begin to lower interest rates, and thus it will provide a headwind to the investment income of Globe Life. However, inflation has proved much more persistent than expected. Thanks to the aggressive stance of the Fed, inflation is likely to begin to subside next year, but it is likely to remain above the target of 2% for a long period. Therefore, the Fed is not likely to reduce interest rates anytime soon.
Final thoughts
Globe Life has proved a rare safe haven in the ongoing bear market. Due to the vast outperformance of the stock, its rally is likely to pause for a while, though the stock remains reasonably valued. Overall, Globe Life has proved an ideal stock for the investors who can ignore stock market gyrations and remain focused on the long-term prospects of this exceptionally well managed insurance company.
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