Dividend shares could be a wonderful supply of passive earnings and may help you develop your wealth over time. Firms with shares which have excessive dividend yields could be fairly interesting. One such dividend inventory with a excessive yield of 8.6% is Lincoln Nationwide (LNC -2.23%), a life insurance coverage and retirement advantages firm.

Whereas its ultra-high-dividend yield makes it an interesting inventory to contemplate for earnings traders, the inventory worth has taken a success during the last 12 months. That is as a result of it has publicity to SVB Monetary, the holding firm of Silicon Valley Financial institution, which was seized by regulators final month. Here is what you must take into account earlier than shopping for Lincoln Nationwide for its dividend.

Lincoln Nationwide struggled whereas the insurance coverage business bounced again

Lincoln Nationwide is a holding firm that operates a number of insurance coverage and retirement companies via its subsidiaries. It offers life insurance coverage, group insurance coverage for firms, and retirement planning providers.

Whereas life insurers struggled throughout the pandemic from COVID-19-related mortalities, many staged a restoration final 12 months as claims payouts declined. Because the begin of 2022, the iShares U.S. Insurance coverage ETF has gained 5.8%, and a few prime life insurers noticed inventory features of 26% or extra throughout the 12 months. Lincoln Nationwide hasn’t loved the identical success, with the inventory worth falling 67.8% for the reason that begin of final 12 months.

IAK Whole Return Degree information by YCharts.

What’s weighing down Lincoln Nationwide?

The insurer’s struggles got here to gentle within the third quarter of 2022 when it did its annual overview of deferred acquisition prices and reserve assumptions. In that quarter, Lincoln Nationwide posted a $2.6 billion loss, with $2.2 billion coming from a change in life insurance coverage reserves the corporate is required to put aside. The reserve construct got here as information confirmed that folks over 75 years outdated had been extra more likely to preserve Lincoln Nationwide’s assured common life insurance coverage insurance policies than the corporate anticipated. There was additionally a $634 million discount in life insurance coverage unit goodwill. 

These points weakened Lincoln Nationwide and resulted in a score downgrade from steady to detrimental by Fitch Rankings. One cause for the score downgrade was the change in its risk-based capital (RBC) ratio. The RBC is a ratio that regulators use to trace how a lot capital an insurer ought to maintain to cowl its liabilities. This ratio measures an insurer’s surplus; the upper the proportion, the extra sound an organization’s monetary place is.

An RBC under 200% requires regulatory motion, however firms maintain themselves to a a lot increased normal for his or her enterprise. Lincoln Nationwide’s administration workforce desires to see this ratio above 400%. So when its RBC fell from 427% to 377% by the top of the 12 months, it needed to take motion and rebuild its capital. To take action, Lincoln Nationwide suspended share buybacks via 2023, raised $1 billion via most well-liked inventory, lower bills, and directed its focus to low-guarantee merchandise. 

As if that wasn’t sufficient, Lincoln Nationwide additionally received caught up within the failure of Silicon Valley Financial institution, holding $89 million in unsecured debt in its guardian firm, SVB Monetary, which equals 1.1% of its complete year-end surplus. 

Is its dividend sustainable?

Lincoln Nationwide does not normally pay out a hefty dividend yield; its common dividend yield during the last 10 years is 2.2%. The one cause its dividend at present yields 8.5% is due to the massive decline in its share worth over the previous 12 months. Regardless of the sell-off, its valuation aligns with latest historical past.

LNC PE Ratio information by YCharts.

Suneet Kamath, an analyst at Jefferies, cited concern over Lincoln Nationwide’s monetary place in notes to traders in latest months. Kamath estimates that Lincoln Nationwide’s normalized free money stream will are available in round $200 million in 2023 — down dramatically from its prior annual stage of $900 million. Whereas Kamath expects free money stream to enhance modestly to $400 million or $500 million by 2024, it nonetheless “leaves little margin for error.” 

Lincoln Nationwide is working to enhance its capital place, however its lackluster efficiency when different life insurers had been recovering has me skeptical. The corporate mentioned it is going to droop its share repurchase program via 2023. Final 12 months it spent $550 million in share repurchases and one other $310 million in dividends. 

Whereas suspending the share buyback program may preserve the dividend fee intact, its monetary place has me doubting that its excessive dividend yield is sustainable. Lincoln Nationwide might current a possibility for traders with a excessive tolerance for threat. Nevertheless, earnings traders searching for a dependable stream of passive earnings ought to look elsewhere till the insurer’s monetary state of affairs improves.