In my last article, I talked about how the S&P 500 Index (SPY) broke a significant trendline and will be heading lower. Since that article, The SPY has gone down almost 30 points as of this writing, bringing even more stocks down. For example, Unum Group (UNM) stock is down ~45% since its all-time high in December 2017 and is arguably undervalued. This decline is driven by interest rates heading lower and lower every year. The insurance industry is sensitive to the direction of interest rates because they invest in fixed income securities, e.g., long-term bonds.

More recently, persistent inflation, the US Federal Reserve’s tapering action, the possibility of interest rate increases, and the war in Ukraine are pressuring stock prices. However, the current stock price of $27.52 is right in the middle of the 52-week range, which is between $22.25 and $31.98 per share. Thus, Unum looks like an undervalued stock that seems to be in the right place to buy up shares.

Source: StockRover*

Overview of Unum

Today’s article will cover Unum Group, an insurance holding company providing a broad array of financial protection benefits and services. The company operates through its Unum US, Unum UK, Unum Poland, and Colonial Life businesses, providing disability, life, accident, critical illness, dental, and vision benefits to millions of customers. The $5.5 billion company generated approximately $12 billion in revenue in 2021 and the last 12 months.

Source: Unum Investor Presentation

UNM Dividend Growth, Yield, and Safety

We will now look at UNM’s dividend growth, yield, and safety. We will then determine if it’s still a good buy at current prices.

Dividend Growth

UNM is considered a Dividend Contender, a company that has increased its dividend for more than ten years in a row. In this case, UNM had increased its dividend for 14 consecutive years. UNM’s most recent dividend increase was 5.3%, announced in May last year. Also, according to Portfolio Insight*, UNM has a five-year dividend growth rate of 8.73% CAGR and a 10-year dividend growth rate of 11.47%, which is impressive considering how fast inflation increased last year.

Source: Portfolio Insight*

Something essential to note is that UNM continued to pay its dividend during the most challenging period in the last 100 years. Many businesses and industries were cutting or suspending their dividend payments during the COVID-19 pandemic. However, UNM continued to pay out its dividend and increased it. That is very remarkable. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.

Dividend Yield

The company has an excellent dividend yield of around 4.51% as of this writing, which is more than double the current dividend yield of the S&P 500 Index. This yield is a respectable initial dividend yield for those income-driven investors. This dividend yield is also really good for investors leaving the bond market looking for higher yields. For comparison, the yield of the 10-year US Treasury was 1.86% at close yesterday.

Source: Portfolio Insight*

According to Portfolio Insight*, UNM’s current dividend yield is higher than its own 5-year average dividend yield of roughly 3.72%. I like to look at this metric because it gives me a good idea if a company I am researching is undervalued or overvalued based on the current and 5-year average yield. Stock price and dividend yield inversely correlate with one another. If the stock price goes higher, the dividend yield goes lower and vice versa.

Dividend Safety

Let’s determine if the current dividend is safe? Dividend safety is a critical metric to look at as a dividend growth investor. Sometimes, undervalued dividend stocks can present us with a “value trap,” and the stock price can continue to head lower.

To determine if the dividend payments are safe every year. First, we must look at two critical metrics. The first one is earning-per-share (EPS), and then we must look into free cash flow (FCF) per share or operating cash flow (OCF).

Analysts predict that UNM will earn an EPS of $4.60 per share for fiscal year (FY) 2022. Analysts are very accurate when predicting UNM futures EPS. In addition, the company is expected to pay out $1.26 per share in dividends for the entire year. This value will give us a payout ratio of ~27% based on EPS. Having a 50% or lower dividend coverage with a dividend yield of over 3.0% gets me very excited. This fact will allow the company to continue to grow its dividend at a double-digit rate or a high single-digit rate as has it has been doing the past ten years. 

UNM has a dividend payout ratio of 14.9% on an operating cash flow basis. Thus, the dividend is well covered in both EPS and OFC.

UNM Capital Revenue and Earnings Growth / Balance Sheet Strength

We will now look at how well UNM performed and grew its EPS and Revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.

UNM revenues have been growing modestly at a Compound Annual Growth Rate (CAGR) of 1.5% for the past ten years. Net income, however, did a little worse with a CAGR of (-0.9%) over the same ten-year period. 

However, EPS has seen a much better growth rate than revenue and net income. EPS has grown 4.4% annually for the past ten years. And over the past five-year, EPS has had a CAGR of 0.4%. EPS had a significant decrease from FY2020 to FY2021, with a decline of 12% year-over-year. 

Even though revenue, net income, and EPS did not have remarkable growth, what makes this stock attractive is its valuation and dividend yield. We will talk about the company valuation and dividend yield later in this article. In the meantime, analyst predicts that the company will grow EPS at an 8% rate over the next five years. 

Last year’s EPS was down from $4.93 per share in 2020 to $4.35 per share for 2021, a significant decrease of 12%. The two years were challenging because of the COVID-19 pandemic. Also, analysts expect UNM to make an EPS of $4.60 per share for the fiscal year 2022, which would be a 6% increase compared to 2021. 

In addition, the company has a solid balance sheet. Currently, UNM has an S&P Global credit rating of BBB, a lower-medium investment-grade rating. Fitch gives the same rating. Also, the company has a debt-to-equity ratio of 0.3, which is excellent. Thus, the company has a strong balance sheet to overcome significant economic downturns like the COVID-19 pandemic last two years.

Unum’s Risks

As with all investment ideas, there are always risks. UNM’s most significant risks are that it is very dependent on the interest rate. If the interest rate stays low for a longer time, this makes it increasingly tricky for Unum’s investment managers to find safe, relatively high-yielding assets to buy. It also means that Unum will need to go outside the realm of traditional bond securities to seek out higher-yielding but riskier investments. However, if the interest rates increase, it will help revenues and earnings growth going forward. Based on the last US Federal Reserve announcements, it looks like interest rates will rise in 0.25% increments in 2022 to address persistently high inflation, which will help UNM’s earnings, thus increasing share price.

UNM Capital Valuation

One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Furthermore, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business is ultimately equal to the sum of the future cash flows that that business can provide. 

Let’s first look at the P/E ratio. UNM has a P/E ratio of 5.84X based on FY2022 EPS of $4.60 per share. The P/E multiple is excellent compared to the past 5-year PE average of 8.9X. If Unum’s stock price were to revert to a P/E of 8.9X, we would obtain a price of $40.94 per share. Based one P/E ratio Unum stock is undervalued.

Now let’s look at the dividend yield. As I mentioned, the dividend yield currently is 4.51%. There is good upside potential in UNM’s own 5-year dividend yield average of 3.72%. For example, if UNM were to return to its dividend yield 5-year average, the price target would be $32.23.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 6%. I use a 10% discount rate because of the higher-than-normal current dividend yield. The projected dividend growth rate is lower than its past 5-year average but conservative. This calculation gives us a fair price target of $33.92 per share.

If we average the three fair price targets of $40.94, $32.23, and $33.92, we obtain a reasonable, fair price of $35.69 per share. This value gives UNM a possible upside of about 34.2% from the current $27.52 share price. Unum Group stock is clearly undervalued and a deal at the current price.

Conclusion on Unum Group (UNM) Stock Is Undervalued

Unum is a high-quality company that should meet most investors’ requirements and the stock is undervalued. The company has a market-beating 4.51% yield, high single-digit long-term dividend growth recorded; it’s a Dividend Contender with 14 consecutive years of dividend increases and a low payout ratio. Furthermore, the stock has the potential for the share price to appreciate since I estimate the stock is approximately 34.2% undervalued. Unum is a world-class corporation that is on sale. Thus, I have a buy recommendation on it.