Jackson Financial Investment Case

September 17, 2021

Market Cap: $2.35BN

JXN: $24.70

Price Target: $40

Upside: +62%

Resources

Form 10

Investor Presentation

Summary

Jackson Financial (JXN) is in the process of being spun off from Prudential PLC (PUK). Classic spin-off factors (detailed below) have led to indiscriminate selling pressure leading the stock to trade to trade at an attractive absolute and relative value (1x annualized adjusted earnings and 0.27x book value). The Form 10 indicates management intends to return $325MM to $425MM to investors within 12 months through dividends and buybacks. At the midpoint, this represents 16% of the current market cap. I believe a dividend initiation will drive a rapid re-rating. Finally, Jackson is a taxable spin-off (no 2 year waiting period for a potential acquisition). Apollo through its Athene subsidiary bought an 11% stake in Jackson last summer at $4.5BN equity valuation (+88% vs. current market cap). I would not be surprised if Apollo tried to buy the remaining company in short order. US investors will receive their JXN shares on Monday so we may see more indiscriminate selling pressure early next week. Nonetheless, I don’t need to bottom tick the stock. I think it looks very attractive at the current valuation.

Classic Spin-off Set Up

This situation is a classic “Greenblatt” spin-off set up. In other words, it’s a set up for indiscriminate selling and mispricing

  1. There is a massive difference between the market cap of the parent ($55BN) and spin-off ($2.4BN).
  2. The distribution ratio is extreme (1:40).
  3. The parent co is an international company and the spin-off is a US company.
  4. The spin-off is taking place in two phases. UK investors received their stake on September 13 and have been selling. US investors will receive their stake on September 20.
  5. The parent will retain (and likely later sell) ~20% of the company within a year, providing an overhang on shares.

All these forces have put selling pressure on Jackson Financial (JXN). It has resulted in a very cheap company. Currently, it is trading at 1x annualized earnings and 0.27x book value (excluding AOCI). Peers include Brighthouse Financial (BHF) which trades at 2.7x forward earnings and 0.36x book value (excluding AOCI) and Equitable Holdings (EQH) which trades at 5.1x forward earnings and 1.5x book value (excluding AOCI).

Apollo through its Athene subsidiary bought an 11% stake in Jackson last summer at $4.5BN equity valuation (+88% vs. current market cap).

Since that investment (June 18, 2020), the S&P 500 has rallied 46%, BHF has rallied 41% and EQH has rallied 47%.

A cheap stock can stay cheap for a long time, but I think two catalysts will force the market to re-rate the stock.

Management has indicated that it intends to pay a dividend.

The Form 10 indicates management intends to return $325MM to $425MM to investors within 12 months through dividends and buybacks.

While buybacks would create more value, I’m hopeful the majority of the capital return will come through dividends as it will force the stock to rerate. $325MM to $425MM of capital returns represents 14% to 18% of JXN’s current market cap.

BHF has focused on buybacks and it continues to trade at a huge discount to book value. EQH pays a nice dividend (2.4% yield) and trades at 1.5x book value.

The second catalyst will be index funds buying the stock.

I have no knowledge of whether this stock will be added to any indexes, but my hunch is it will. It is a pretty large company.

For comparison purposes, index funds own about 20% of BHF.

Index funds own ~19% of EQH.

I think we might go from indiscriminate selling pressure to indiscriminate buying pressure.

Business Background and Overview

Prudential PLC initially bought Jackson Financial in 1986 for $608MM.

The company has 2,900 full-time employee and manages more than three million policies and $351 billion in assets under management as of March 31, 2021

The company generates its revenue primarily through annuity sales.

The company has a stable history and has historically managed risk well.

One thing that is notable is that the Jackson’s subsidiaries have paid $4.1BN in dividends up to the holding company over the past ten years (170% of current market cap). Going forward, these dividend payments should go out to investors or be used to buy back stock.

Capitalization and Valuation

Jackson has 94.5MM shares outstanding.

From my industry knowledge, the best way to analyze life insurance and annuity companies is based on price to earnings and price to adjusted book value.

In Q1 2021, JXN generated $568MM of adjusted net income or $2.2BN on an annualized basis. Thus, it’s trading at a P/E of ~1x.

As of Q1 2021, JXN had an adjusted book value of $8.814BN (ex-AOCI). Thus, it’s trading at a price 0.27x.

Peers include Brighthouse Financial (BHF) which trades at 2.7x forward earnings and 0.36x book value (excluding AOCI) and Equitable Holdings (EQH) which trades at 5.1x forward earnings and 1.5x book value (excluding AOCI).

Based on peers, at the low end (0.36x book value) Jackson should trade at $34/share. On the high end (5.1x earnings), Jackson should trade at $123/share.

Apollo through its Athene subsidiary bought an 11% stake in Jackson last summer at $4.5BN equity valuation (+88% vs. current market cap).

Since that investment (June 18, 2020), the S&P 500 has rallied 46%, BHF has rallied 41% and EQH has rallied 47%.

If Jackson is worth the valuation that Athene invested at ($4,545MM), it’s stock should trade $48/share.

I haven’t seen any sell side reports (please share if you can!), but ISI thinks Jackson is worth $34/share.

While Morningstar think it’s worth $3.44BN ($36/share).

Risks

  • Interest Rates
    • Low interest rates make it hard for annuity and life insurance companies to earn their required return.
  • Equity Market Drawdowns
    • Equity market drawdowns negatively impact annuity providers returns although Jackson attempts to hedge to mitigate any market drawdown and has historically managed risk well.

Disclaimer/Disclosure

Rich Howe, owner of Stock Spin-off Investing (“SSOI”), owns shares of JXN. All expressions of opinion are subject to change without notice. This article is provided for informational purposes. Please do your own due diligence and consult with an investment adviser before buying or selling any stock mentioned on www.stockspinoffinvesting.com.