Globe Life: Reasonably Valued, Even At Its All-Time High (NYSE:GL)

In late 2020, I recommended buying Globe Life (NYSE:GL) for its 35% upside over the following two years. Since my article, the stock has rallied 40%, to a new all-time high, and thus it has exceeded my price target. In addition, it has outperformed the S&P 500 by an impressive margin, as the index has gained only 8% over the same period. This vast outperformance may lead some investors to think that Globe Life has become overvalued. However, while the stock will probably take a breather in the short run, it remains reasonably valued from a long-term perspective.

Business overview

Globe Life is an insurance company, which offers life and health insurance to its customers. It generates approximately 72% of its underwriting margin from life insurance and the remaining 28% from health insurance.

Globe Life has a relatively boring business model and hence it passes under the radar of most investors. However, this is a shame, as the company is exceptionally well-managed, with an admirably consistent growth record. Globe Life has grown its earnings per share every single year over the last decade, except for 2020, when the insurer reported a 1% decrease in its earnings per share due to the coronavirus crisis. A 1% dip in earnings during a severe downturn, which caused a fierce recession and an abnormally high number of deaths and insurance claims, is certainly benign. During the last decade, Globe Life has grown its earnings per share by 8.0% per year on average.

A consistent growth record is important in every sector but it is especially important in the insurance business. Some insurers reduce the premiums they charge in order to attract new customers and enhance their market share. This strategy seems highly profitable during favorable years, which are characterized by a small number of claims. However, whenever an adverse year shows up, these insurers incur excessive losses. Therefore, it is critical to examine the long-term performance of insurance companies in order to make sure that they follow a disciplined underwriting policy. The consistent growth record of Globe Life is a proof of the quality of its management. It also helps explain why Berkshire Hathaway (BRK.B) (BRK.A) has been the largest shareholder of Globe Life, with a 6% stake, for more than a decade.

Globe Life is currently recovering from the pandemic, with remarkably strong business momentum. In the third quarter, it grew its life underwriting margin by an impressive 28%, primarily thanks to a steep decline in COVID mortality. As a result, the company grew its operating earnings per share 21% over the prior year’s quarter, from $1.78 to an all-time high of $2.15, exceeding the analysts’ consensus by $0.05.

Reported earnings per share grew only 3% due to the aggressive interest rate hikes implemented by the Fed. Higher interest rates caused the mark-to-market value of the fixed income portfolio of Globe Life to decrease. However, this decrease is of no significance, as the insurer keeps all its bonds until they mature. Therefore, investors should focus on the operating earnings of Globe Life. The company is expected to report 18% growth of operating earnings per share for the full year 2022.

Apart from the recovery from the pandemic, Globe Life currently enjoys another strong tailwind, namely the environment of fast-rising interest rates. Due to the surge of inflation to a 40-year high, the Fed is raising interest rates at a fast pace in order to cool the economy and thus restore inflation to its long-term target of 2%. Higher interest rates help Globe Life invest its float at much higher yields and thus increase its investment income significantly. This is a strong tailwind for the company.

The investment income of Globe Life had remained suppressed for the past 14 years due to the depressed interest rates that prevailed throughout that period. However, now that interest rates have increased, Globe Life expects its investment income to grow 10%-12% in 2023. Analysts seem to agree on the positive effect of high interest rates on the earnings of Globe Life. They expect the company to grow its earnings per share by 17.5% in 2023 and by another 9.5% in 2024.

Valuation

Despite its rally, the stock of Globe Life is still trading at a reasonable forward price-to-earnings ratio of 12.6. It is also trading at 11.6 times its expected earnings in 2024 and 10.8 times its expected earnings in 2025. Therefore, despite its vast outperformance over the last two years, Globe Life remains reasonably valued.

On the other hand, due to the steep rally of Globe Life to a new all-time high, investors should be aware that the stock might consolidate around its current levels for an extended period. However, this is natural. Globe Life has always been a slow-moving, low-volatility stock, but it has also almost always offered excessive returns to its long-term shareholders. Thanks to its consistent and reliable business model, Globe Life is an ideal buy-and-hold-forever stock. Therefore, the investors who can maintain a long-term perspective should probably resist taking their profits.

Risk

The primary risk for Globe Life is the adverse scenario of a severe recession. In such a case, the price-to-earnings ratio of the stock will probably decrease. In addition, the Fed will probably begin to lower interest rates in such an adverse scenario. As a result, it will exert pressure on the investment income of Globe Life.

On the bright side, a severe recession is unlikely. The Fed is trying to cool the economy in order to reduce inflation towards its target level but it is closely monitoring economic conditions to prevent a deep recession. To cut a long story short, just like most companies, Globe Life will be hurt in the event of a fierce recession but the odds of such an event are low. It is also important to note that Globe Life has always proved resilient to recessions, including the Great Recession and the recession caused by the pandemic in 2020.

Final Thoughts

Globe Life has rallied 40% in about two years and thus it has become much less attractive than two years ago, when it was a screaming bargain. Due to its steep rally, its short-term upside seems to be limited. Nevertheless, the stock remains reasonably valued and hence it is likely to continue offering attractive returns to its shareholders in the long run.