The insurance industry is often an attractive area for value investors, who love the concept of actuaries determining with confidence the amount of premiums needed to cover the outlay of payments while factoring in a given amount of profit. This leads to a fairly reliable stream of income, which is the cause of the attraction for value investors who seek to make their investment decisions based primarily on factual data. However, it is important to also determine which specific company in the industry may be a worthwhile investment through a calculation of intrinsic value, analysis of risk, and comparison to other companies both within the industry and in other industries. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Unum Group fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Unum Group is a provider of disability insurance products in the United States and the United Kingdom. The Company also provides a portfolio of other insurance products, including employer- and employee-paid group benefits, life insurance, and other related services. The Company operates in five segments: Unum US, Unum UK, Colonial Life, Closed Block and Corporate. The principal operating subsidiaries in the United States are Unum Life Insurance Company of America (Unum America), Provident Life and Accident Insurance Company (Provident), The Paul Revere Life Insurance Company (Paul Revere Life), and Colonial Life & Accident Insurance Company, and in the United Kingdom, Unum Limited.
Defensive Investor – must pass all 6 of the following tests: Score = 5/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$38.29|
|Value Based on 0% Growth||$22.45|
|Market Implied Growth Rate||1.99%|
Balance Sheet – 9/30/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Unum Group is a rather attractive company for the Enterprising Investor, and will likely soon qualify for the Defensive Investor as well. Currently, the company does not qualify for the Defensive Investor because it had a negative earnings year in 2004, so it has not met the requirement of 10 straight years of positive earnings. Next year it will more than likely satisfy that requirement, but for now Defensive Investors should merely keep the company on the watch list. Enterprising Investors wishing to follow the ModernGraham approach based on Benjamin Graham’s methods should feel good proceeding with further research including a review of ModernGraham’s valuation of AFLAC Inc. (AFL) and other companies that pass the ModernGraham requirements. From a valuation side of things, the company has done well, having grown its EPSmg (normalized earnings) from $1.33 in 2008 to $2.64 for 2013. This solid level of growth outpaces the market’s implied estimate for growth of only 1.99%, leading the ModernGraham valuation model to return an intrinsic value greater than the market price. As a result, the company appears to be undervalued at the present time.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Unum Group (UNM)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in Unum Group (UNM) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.