Undervalued Dividend Champion: Is Lincoln National Corporation a Buy at Current Levels?

Lincoln National Corporation (LNC), a leading provider of life insurance and annuity products, presents an intriguing investment opportunity amid its undervalued stock price and robust dividend yield. However, investors must weigh these positives against rising interest rates and mounting financial headwinds. Let's dissect LNC's valuation, dividend sustainability, and its ability to navigate today's economic landscape.

The Case for Undervaluation

LNC's intrinsic value, as calculated by multiple models, far exceeds its current market price. As of June 2025, the base-case intrinsic value stands at $91.90 per share, derived from averaging Discounted Cash Flow (DCF) and relative valuation methods. This compares to a market price of $33.12, implying a 64% undervaluation. The DCF model, which assumes a 7.57% WACC, estimates a $128.43 per share value, while relative valuations using P/E and P/B multiples suggest a lower $55.37 per share.

This wide disparity between intrinsic and market value suggests a compelling entry point for long-term investors. Analysts' price targets range from $32.32 (2% downside) to $50.40 (52% upside), with an average target of $38.86—still below the intrinsic value midpoint.

Dividend Sustainability: High Yield, But Risks Lurk

LNC offers a 5.41% dividend yield, well above the market average and sector peers. The payout ratio of 29.31% appears sustainable, as earnings theoretically cover dividends. However, recent financials paint a mixed picture:

• Q1 2025 Results: Net loss of $722 million, driven by declining revenues ($4.69 billion vs. prior quarters).
• Cash Reserves: A fortress-like $37.8 billion in cash and short-term investments provides a buffer against liquidity risks.
• Debt Concerns: A debt-to-equity ratio of 106.6% raises eyebrows, but an interest coverage ratio of 4.9x suggests manageable debt servicing.

The dividend's “Very Unsafe” safety score stems from volatile earnings and elevated debt. Investors should monitor whether LNC can stabilize earnings through strategic shifts, such as its Bermuda reinsurance subsidiary and focus on spread-based products, which aim to reduce volatility and boost capital efficiency.

Interest Rate Environment: A Double-Edged Sword

The Federal Reserve's 5.25% federal funds rate creates both challenges and opportunities:

• Headwinds: Rising rates pressure LNC's bond-heavy investment portfolio, as bond prices fall when rates rise. This could squeeze investment income and exacerbate losses from alternative investments, which underperformed in Q1 2025.
• Tailwinds: Higher rates benefit life insurers' cash value policies, where guaranteed returns rise. LNC's participating policies (which distribute dividends) could see improved returns, attracting policyholders.

LNC's $8.74 billion debt load is a concern, but its risk-based capital (RBC) ratio of 425-435% exceeds regulatory minimums, offering a safety margin. Management's hedging programs aim to mitigate interest rate risks, though prolonged high rates could strain margins.

Key Risks to Consider

1. Earnings Volatility: The net loss in Q1 2025 underscores reliance on volatile investment returns.
2. Regulatory and Macroeconomic Factors: Tariff-related inflation and federal debt levels could disrupt markets.
3. Dividend Cut Risk: If earnings remain depressed, the dividend—currently $0.45 per share quarterly—might face scrutiny.

Investment Thesis

Bull Case: LNC's intrinsic value gap and dividend yield make it a compelling value play. If earnings stabilize and interest rates peak, the stock could rebound toward its DCF-derived value.

Bear Case: Persistent revenue declines, rising interest costs, and capital strain could erode the dividend and further depress the stock.

Final Recommendation

Lincoln National Corporation presents a high-risk, high-reward opportunity. Investors with a long-term horizon and tolerance for volatility may consider a position at current levels, given its 64% undervaluation and 5.41% yield. However, caution is warranted:

• Buy: For investors who believe LNC can stabilize earnings and improve capital efficiency.
• Hold: If you prefer to wait for clearer signs of recovery in revenue and profitability.
• Avoid: If you prioritize safety over potential upside.

In conclusion, LNC is a company to watch closely. Its undervaluation offers allure, but success hinges on executing its strategic shifts and navigating the high-rate environment. Stay informed, and proceed with care.