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Thesis article
Jackson Financial Corporation (New York Stock Exchange: GXN) has had a very good return of 150%+ over the past year, however, its valuation is still very low. In this article, we’ll take a look at the company’s business model, opportunities, and whether Jackson… Finance is a good investment at current prices.
Past coverage
I don’t cover Jackson Financial publicly on Seeking Alpha, but we do cover it on Cash Flow Club. I covered Brighthouse Financial (BHF), a relatively similar company, here at Seeking Alpha in 2021.
Company overview
Jackson Financial Inc. It is an insurance company that focuses on providing annuities to its clients, most of whom are individual investors. Its offerings include retirement and savings products such as variable and index-linked annuities and lifetime income solutions. This may not sound very exciting, and whether their offers are attractive to customers remains to be seen debate. But for Jackson Financial shareholders, these products could be excellent, as the company generates attractive profits via these offerings.
While Jackson Financial’s track record as a publicly traded company is not very long, the company has a much longer history. Jackson Financial has spun off from Prudential plc (PUK), meaning its business operations have a much longer track record than as a standalone company, which began in 2021.
Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) has proven that insurance operations can be very profitable, at least in part because insurers can leverage insurance floats to generate investment income. My colleague in the Cash Flow Club, Darren McCammon, described this as: Using other people’s moneywhich is a very appropriate term.
Of course, the underlying insurance operations themselves should also generate profits, which means that the profits generated by investing the insurance float are just the icing on the cake.
These elements are not unique to Jackson Financial, of course, as the company’s peers, including Brighthouse Financial, American International Group (AIG), Lincoln National (LNC), etc., operate in a similar way. Thus one might argue that insurance companies, or annuity providers, can generally be attractive investments, at least as long as they are well managed. Management errors, for example, those that led to AIG’s problems during the bursting of the housing bubble, can turn insurance companies into bad investments. Also, when investors buy stocks at a valuation that is too high, the total returns can be unattractive, even if the underlying business is performing well and management is making the right decisions – shareholders who bought Cisco (CSCO) at the highest price – com bubble will know this all too well.
Jackson Financial appears to be a well-managed insurance company that is doing well operationally. GAAP results for pension companies like Jackson Financial can be confusing, with Jackson Financial sometimes reporting negative GAAP revenues. This is due to the losses on financial derivatives recorded by the company during some quarters. Jackson Financial uses these derivatives to hedge its portfolio against movements in interest rates and other macro items. In some quarters, these hedges add to its revenues, while in other quarters they create revenue headwinds. However, the impact of changes in the market value of JXN derivatives is a non-cash component, which is why Jackson Financial also reported a non-GAAP revenue number which is more indicative when it comes to the performance of the underlying business. After all, the rise and fall in the value of derivatives on a company’s balance sheet that are used for hedging purposes doesn’t tell us much about the underlying business performance.
During the most recent quarter, GAAP revenue was negative – due to the aforementioned moves in Jackson Financial’s derivatives position. However, non-GAAP revenue was attractive, with fee income up 5% year over year, while net investment income was up 4% year over year. Granted, this isn’t as much growth as NVDA (NVDA), but the valuation is quite low, meaning even a mid-single digit growth rate isn’t bad at all.
Like almost every company, Jackson Financial also reports non-GAAP earnings. These return one-time and non-cash items as well, such as movements in derivatives positions. On an adjusted basis, Jackson Financial generated revenue of $334 million during the most recent quarter, or just over $1.3 billion on an annualized basis. This was up 23% compared to the same period a year earlier, as Jackson Financial benefited from higher fee income, while operating leverage also worked in the company’s favour.
Earnings per share were $4.23 for the quarter compared to $3.15 during the previous year’s quarter. This was a 34% increase compared to the same period a year earlier – a much stronger growth rate compared to the company-wide profit increase. This can be explained by Jackson Financial’s very shareholder-friendly strategy when it comes to returning cash to the company’s owners. The following chart shows the number of Jackson Financial shares over the years:
Since Jackson Financial’s IPO about three years ago, the company has reduced its stock count by about 20%. This has increased each share’s share of the overall earnings pie by about 25% over the past three years, giving a nice extra boost to Jackson Financial’s earnings per share growth.
But JXN’s buybacks not only generate additional earnings per share growth, they are also very useful for another metric: Jackson Financial’s book value. While book value is not necessarily a good measure of valuing a technology company or pharmaceutical company, financial industry companies have a high proportion of liquid and readily valuable assets on their balance sheets, so the book value of these companies is an appropriate measure.
Jackson Financial’s book value was $124.42 at the end of the last quarter, up about 3% from the previous quarter (4Q 2023). This was possible despite the company-wide book value remaining flat over this time frame, at $9.6 billion – the decline in the number of JXN shares increased the book value per share at a double-digit annual pace. With Jackson Financial trading at around $70 per share today, there is a clear discount to book value – repurchasing shares under these conditions increases book value per share.
Jackson Financial also reports an adjusted book value figure, where preferred stock and accumulated other comprehensive income (loss) are excluded. Accumulated other comprehensive income (loss) can be positive or negative, depending on where interest rates are. Currently, interest rates are relatively high, compared to the past two years, resulting in the AOCI being negative. When AOCI is supported, book value is higher, at $147.17 per share as of the end of last quarter. While some may prefer to look at the GAAP book value rather than the adjusted measure, it is possible that the adjusted book value is the more telling number, as the AOCI can distort the number up or down due to price fluctuations under interest rate sensitive assets. But when JXN owns treasuries, for example, and plans to hold them until they mature, short-term price fluctuations in these treasuries are not important to the company.
If one looks at adjusted book value, JXN is currently trading at just under 0.5x book value today, which is very cheap. Investors who prefer the GAAP number see a book value multiple of about 0.6, which is still far from high. This suggests that Jackson Financial will be able to achieve significant future book value growth if the company continues to buy back shares at a significant discount to book value.
Is JXN a good investment?
Jackson Financial Inc. Highly profitable, the company is seeing strong growth in fee income thanks to strong index-linked annuity sales (which reached a record high last quarter). The shareholder-friendly capital allocation approach of buying back shares at an aggressive pace is also attractive.
Jackson Financial offers a dividend yield of 3.8%, which is not very high but adds nicely to the company’s total return outlook. While buying JXN a year or half a year ago would have been better, JXN doesn’t look like a bad investment at all here, trading at about 0.6x its GAAP book value and just under 0.5x its value. Adjusted bookkeeping.
