Unum Group: Further Stock Growth Likely In 2024 (NYSE:UNM)

Unum Group (NYSE:UNM) has positive momentum going for it as the stock is up 17.6% so far year-to-date. The stock has an attractive valuation, leaving more upside potential in 2024. Unum’s steady revenue and earnings growth make for a stable dividend investment.

Unum Group is a $10 billion market cap company that offers various insurance products in the United States, United Kingdom, and Poland. The insurance products include: group life, individual life, disability, accidental death and dismemberment [AD&D], dental, vision, accident, sickness, cancer, and critical illness.

The Unum U.S. segment comprises 65.5% of total premium income. This segment handles group disability, group life & AD&D, voluntary benefits, individual disability, and dental & vision. The Colonial Life segment comprises 17.2% and offers accident, sickness, life insurance, disability, cancer, and critical illness products. Closed Block comprises 9.1% and consists of group and individual long-term care and other insurance products that are no longer being marketed. The Unum International segment comprises 8.2% of total premium income and consists of Unum’s United Kingdom and Poland insurance businesses.

Unum Group’s Growth Strategy

Unum’s overall focus is to provide key insurance coverages to financially protect people from unfortunate events such as illness, serious injury, and death. Unum tends to focus on marketing its insurance products to employers for group coverage plans. This allows the company to secure large quantities of customers so that the business can scale up efficiently. Unum remains nimble by watching trends and adapting to the changing needs of the marketplace. The company does this while rewarding shareholders with a 2.7% dividend and through share repurchases. Unum paid out $277 million in dividends and repurchased $250 million worth of stock in 2023.

Unum also analyzes the market environment and adjusts to changing conditions. For example, as inflation increased in recent years and labor markets remained strong, Unum was able to adjust premium prices while maintaining growth. The growth was evident in the 4.5% increase in premiums and annuity revenue to $10 billion in 2023 over 2022. One downside was that total operating expenses increased 5% in 2023 over 2022. So, Unum ended up with a decline in net income of 8.8% to $1.3 billion down from the $1.4 billion in 2022.

The good news is that conditions could be better going forward. Unum is well-positioned financially to thrive in the insurance market. The company has 1.2x more total assets than total liabilities for total equity of $9.65 billion. Unum also has a total of $46 billion in total investments and only $3.5 billion in net debt. The investments include $37 billion in debt securities, $3.6 billion in policy loans, $2.3 billion in mortgage loans, $1.4 billion in equity and preferred securities, and $1.8 billion listed as other investments. Unum consistently runs with positive operating cash flow. Unum brought in $1.2 billion in operating cash flow in 2023. Unum’s strong financial position gives the company good flexibility to grow the business while rewarding shareholders with dividends/stock buybacks.

Unum Group received an upgraded credit rating from Fitch Ratings in November 2023. Unum’s financial strength rating for its domestic subsidiaries was upgraded to ‘A’ from ‘A-‘. The company’s senior debt rating was upgraded to ‘BBB’ from a previous ‘BBB-‘ rating. The ‘A’ rating from Fitch indicates high credit quality with low default risk. This is the 3rd highest rating on Fitch’s scale after ‘AAA’ and ‘AA’. The ‘BBB’ rating is considered good credit quality and a low default risk. The ‘BBB’ rating is one level below an ‘A’ rating.

Another positive for Unum in 2024 is that the money rates that insurance companies earn on their investments are ahead of their portfolio book yields. The benchmark for insurance companies’ portfolio earnings is the 10-year Treasury Yield which is currently 4.2% which is up significantly from 1.6% at the beginning of 2022. The fact that the money rates are ahead of insurer’s book yields gives them a cushion even as the Fed is expected to cut rates this year. The high rates will provide an increase in investment income. It will probably take a while for rates to get low enough to have a negative impact on insurance companies.

Attractive Valuation

I like to use the price/book ratio to evaluate insurance companies as it values the stocks based on their net assets. Insurance companies make their money from their invested net assets in addition to the premiums collected. So, using the price/book ratio makes sense. Unum is trading with a trailing price/book ratio of 1.07 and a forward price/book of 0.95. Price to book ratios near or below one are attractive. This is lower than the Life Insurance industry’s price to book ratio of 1.49. Competitor, Globe Life (GL) is close in market cap and is trading with a higher trailing price/book of 2.3 and forward price/book of 1.94.

I also like to measure the effectiveness of insurance companies with the return on equity [ROE] as it measures how effectively profits are generated. Unum has an ROE of 14%. Globe Life has a stronger ROE at 23%. I like to see a strong double-digit ROE and Unum has it. Unum’s strong double-digit ROE can help drive the company’s market share higher which can lead to a growing stock price. However, Globe Life currently has an advantage with a higher ROE. This could enable Globe Life to grow market share at a faster pace than Unum. Investors should watch to see how the ROEs of these companies trend going forward.

Unum’s growth outlook is positive for 2024. Consensus estimates for Unum’s revenue for 2024 is 4% growth or nearly $13 billion. Earnings per share are expected to grow at 6% to $8.12. These look like reasonable expectations if Unum is successful with its strategies that I mentioned earlier in the article.

With 6% expected earnings growth for 2024, operating cash flow is likely to grow this year. Unum looks like it can easily handle its reasonable amount of debt with its positive cash flow. Unum also has the flexibility to continue its dividend payments, repurchase shares, and to expand the business. Unum pays a 2.7% dividend, which is supported by Unum’s positive cash flow.

Technical Perspective

The daily chart above displays a nice uptrend for the stock. The purple RSI indicator (bottom of the chart) has been moving in and out of overbought territory in 2024. The price currently dipped below the overbought territory. So, without any unexpected negative news, the price could bounce higher from here back into the overbought area above 70 on the RSI.

The next earnings report, scheduled for April 30, 2024, could be the next catalyst for the stock. Analysts are expecting EPS for Q1 2024 to be $1.98. This is 4.8% higher than the estimate of $1.89 from 3 months ago. This would also be about a 6% gain over the EPS of $1.87 from Q1 2023. Meeting or exceeding this estimate could have a positive impact on Unum’s stock and cause the uptrend to continue. Missing this estimate could cause a breakdown of the current trend and lead to a sharp correction. How Unum guides for future quarters will also have an influence on the stock price.

Unum’s Long-Term Outlook

Unum’s low valuation leaves room for the stock to appreciate this year. The stock is in a strong technical uptrend which can continue if Unum successfully meets/exceeds its revenue/earnings expectations for most quarters this year.

Unum’s solid strategies are demonstrated to be effective with its double-digit ROE of 14%. These strategies can help Unum achieve its growth expectations in 2024 and beyond. Analysts have a one-year price target of $57 for the stock. This is 6% higher than the current price. The price target looks reasonable and is supported by the 6% consensus expectations for earnings growth in 2024.