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Ready to buy into the Life Insurance sector?

As with all market turbulences, opportunities can be found and the Canadian insurance companies got on my radar recently. I have had them on my watch list for the past few years but only recently have I started looking at them again. Their earnings have not met the analysts expectation and concerns abound with the economic difficulties around the world… One question for many investors is if the dividend is safe. Anyone with a crystal ball?

Here are the companies at a glance.

CompanyTickerPriceDividendsYieldP/EPayout RatioMarket Cap
ManuLifeMFC.TO$11.63$0.134.47%10.7948.15%20.86
Great-West LifeCoGWO.TO$20.40$0.316.08%10.3762.94%19.37
SunLifeSLF.TO$19.13$0.367.53%15.61117.07%11.15
Industrial AllianceIAG.TO$26.93$0.253.71%9.2134.25%2.43

If you look closely at the data, SunLife appears to be the outlier. It would seem to still be priced high and it has a higher P/E than its peers. Something to consider for all the SLF owners (myself included).

ManuLife – MFC

It has been few years now that Manulife got hit hard during the market downturn and it still has not recovered. It has hit the 52-week lows a couple of times and has done so just recently. In 2008, it lost 50% of its valuation and cut its dividends. It still pays dividend and is working on their financial stability. It is a large corporation with a presence world wide that can be seen as a gift or a curse depending on the world economies.

SunLife – SLF

Earlier in the year, I got setup with Sun Life under the transfer agent to DRIP. I also reviewed it back in May but as you probably know, historical figures can’t tell you about the future … Insurance companies are exposed to natural disasters and they got caught in the middle of the bad loans like other financial institutions back in 2008 without the ability to rely on increasing bank fees like many banks did during their recovery to profit :)

A recent article in the Globe & Mail highlights some good points about the health of Sun Life from an investor perspective.

  • First quarterly lost since 2009
  • Payout ratio concerning for the current dividends – although the company reaffirms that cash flow is adequate
  • Change in management with the CEO stepping down
A dividend cut could be devastating for the stock price but then again, it could be the right thing for the company. Here is a snippet from the article referencing the impact of the stock price for ManuLife (which has not recovered).
Another problem, Mr. Sedran noted, is that it alienates long-term investors. When Manulife slashed its dividend it became the first major Canadian financial institution to do so since the early 1990s, and the move sent its stock tumbling 15 per cent in one day.

Great-West LifeCo – GWO

Great-West LifeCo is one corporation under the Power Corporation umbrella. If you already own Power Corporation or Power Financial, you may want to reconsider as you already have a significant exposure to GWO.

GWO’s last quarter results were better than the previous year and showed promise of growth for the year overall. However, considering the sector is under fire due to the low interest rates and general economic uncertainties with Europe, GWO is down like everyone else. It is holding up better as you can see. Consider Power Financial if you want some exposure but not go in exclusively.

Industrial Alliance – IAG

Industrial Alliance is the smaller of the group. I find that IAG is almost like the National Bank in the financial sector – not quite the size of the big player but ready to play with the big boys :). IAG is a North American player for now and even though it doesn’t have business in Europe, it is still affected by the low interest rates and equity markets like the other insurance corporations.

  • Payout Ratio is best of group
  • P/E is best of group
  • Yield is lowest of group

Thoughts

Interestingly enough, I have dealt with them all through either our medical benefits plan or our defined contribution plan. They all have pros and cons with respect to those products from a consumer perspective. They do sell life insurance and Great-West LifeCo benefits from my contribution at the moment.

I like MFC at the 11$ price range. It’s bouncing against its 52-week low at this price and it is the same lows from the 2008 financial melt down. Since then, they have improved their balance sheet and I expect a recovery. They proved that they can weather the storm. This is not a dividend growth investment but rather a value opportunity.

GWO would be my second choice. They have not been impacted directly and are weathering the storm better than its peers. Consequently, you can buy PWF or POW for only  partial exposure. See my POW analysis to understand the ownership structure.

Readers: Any interest in the life insurance companies?

Disclosure: Long PWF, SLF & MFC.

Disclaimer: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your decision at your own risk – see my full disclaimer for more details.

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16 Responses to "Ready to buy into the Life Insurance sector?"

  1. I have GWO and SLF. I think the dividends are safe. They have lots of retained earnings and interest rates can’t stay low forever. Looking to add to my position in late 2012. I have strong praise for the Canadian Life-Cos, because they know how to handle acclaim :D

    • The Passive Income Earner says:

      Thanks for the comment Liquid Ind.

      I think there is a lot of reaction around these stocks with respect to external influences. I also doubt they would reduce the dividends but it’s something to pay attention in case there is an unknown.

  2. Alex says:

    I was looking at SLF (of which I own shares already) and MFC, but wouldn’t have checked out the other two without this article. Thanks for the comparison. On the story of SLF, though, I agree with the above poster that they have the the cash to cover that dividend for years while waiting for interest/economy to turn up and – as you mentioned – they’re very aware of what cutting it will do to their investors. I’m also considering them cheap regardless at that P/E, as the P/B is 0.75.
    I’ll look at IAG and GWO before making any moves, though.

    @Liquid Independence: Are you waiting for the end or 2012 because you think something will happen to the stock prices at that time? Or do you have some other reason?

    • The Passive Income Earner says:

      Glad to be of help Alex!

      When you look at GWO, make sure you check out PWF and POW since they own GWO along with IGM. I like MFC from a value play and along comes a good dividend yield at this price. The divs won’t see growth in the short term but the company has been working on turning itself around for a few years now and that’s about how long it takes to change course for a company this size.

  3. I think SLF is going to face a dividend cut before the end of 2012. Just my opinion. $0.36 divis per share price under $20 is not sustainable long-term.

    Until they cut the dividend, I’m holding. Even if they cut dividend, I’ll probably hold SLF. As for MFC, could be a buy if you’re bullish on them. They just have way too much equity risk I think.

    Stock prices for all lifecos. are getting cheap.

    Own SLF and GWO via PWF. Might eventually own IAG because of conservative management.

    • The Passive Income Earner says:

      @MOA

      I think the div is safe for SLF unless we see some catastrophic event impacting them. Nevertheless, I have it with CIBC Mellon and will keep it there. Probably time to add a little to it :)

  4. Moneycone says:

    I like Aflac. I like the fact that even though they were deeply invested in Japan, even after the disasters there, they were able to continue on gracefully. Shows excellent management strength.

    • The Passive Income Earner says:

      @Moneycone

      Thanks for bringing forth some US insurance companies. What do you make of Cincinatti Financial (CINF)?

  5. PIE I’m going to be the devil’s advocate here, and say that Canadian insurance companies are terrible investments, and that is why the share prices are low – the market has already factored in the technicals.

    These companies (i.e. MFC) have enourmous debt, and enourmous liabilities. Great West and Sunlife have unsustainable dividends that will be cut sooner than later – they simply can’t afford these rich dividends with their low earnings.

    Insurance companies (specifically MFC) require a higher interest rate environment with rising stock markets to be profitable. It’s no surprise SunLife and Manulife issued enourmous Preferred Shares and Bonds this year to make their short-falls.

    Most of these companies are still servicing 6% and 7% corporate bonds from long term investors, but earning far less than that, and even negative earnings. It’s a similar story for MFC which is tied to high interest annuities it must continually pay out month after month. Until interest rates rise these companies are in terrible shape, hence the lower share prices. I don’t see the incentive or value to buy here ;)

    Cheers
    The Dividend Ninja

    • The Passive Income Earner says:

      Very good points Ninja! It’s definitely the reason why many investors are fleeing :) Are they bound for bankruptcy? I don’t believe so. Will dividends be cut? A possibility for some if the situation persist for long time. The question is about the type of investor you want to be, look for the long terms and when is a good entry point. Will interest rise in 2 years, 3 years or 5 years is a question we would all love an answer :)

      In the meantime, I am watching with interest and will be adjusting my holdings accordingly. I don’t really have a lot invested in them and I’d like to think that I am more of a contrarian value investor. Note that value also comes from future expectation. What’s interesting now is that most investor are seeing it as you present it; “Until interest goes up, I stay away …”. The heard is waiting and the first sign of an increase will see the heard move in. It really depends on the outlook of your investment time frame (1 year or 10 years).

      However, I am also conscious of how my money needs to be at work so even though I have a passive income portfolio, you need to pay attention :) With that said, my holdings are not significant in these companies at the moment. I just think there can be opportunities. The economic situation around the world is currently driving the markets like a roller coaster; up and down based on whomever sneezes.

      As aways, thanks for your comments. I like being challenged :) The economic situation is very real and the lifeco don’t have it easy.

  6. PIE This was really an excellent post, becuase you covered these insurance companies in great detail. And you are absolutely right, the best time to buy in is when people are fearful and avoiding a company like the plague ;) Totally agree with you there man!

    Take Cisco Systems (CISCO) for example which is a great example of a company that people were recently avoiding. I would have loved to double my position at $14 per share had I the funds, I was chomping at the bit. However Cisco has minimal debt, increasing earnings, and a solid restructuring plan etc. – which make it a good value play.

    These are all things the insurance companies don’t have. They have high debt, poor earnings, and no restructuring plans – becuase they really can’t restructure. But they also have the added expenses of annuties, bond payments, insurance payments etc. at higher rates than they are earning. They are simply turning over more debt (new shares etc) to fund these obligations.

    Bankrupcty I doubt it, but I think there are more hard times to come for them in 2012. But who knows, maybe I am also missing a great buy opportunity at the bottom ;)

    We will have to see where these insurance companies are in a few months down the road…

    Cheers
    The Dividend Ninja

    • The Passive Income Earner says:

      Agreed. The LifeCo’s are a risky play with the current economic conditions. I have to say that SLF does exhibit many of the issues you outlined. I looked at my dividend analysis of GWO and they have been growing their EPS since 2008 which is a positive sign.

      As a sector, it’s gloom but like most industries and companies, there usually is a turn around at some point. Many companies have defined contribution plans with them funneling money regularly plus life insurance premiums for individuals. I’d say that cash is coming in through fees but not as fast as their commitments so it becomes a bit of a cost cutting structure. I will admit that I have not read the quarterly reports to see what actions are being taken.

      Again, awesome comments and I love the discussion! :)

  7. Hmmm you’ve got me thinking here ;) Maybe there is a good value play to be made soon in this sector…

    An excellent post PIE!

    Cheers
    The Dividend Ninja

    • The Passive Income Earner says:

      Same here! you got me thinking some more. :) I want to look further at the corporate bonds they have issued as you mentioned. I was doing an overview of the sector but it may time to look deeper into each companies and see if it’s doom or gloom (sort of).

      Cheers!

  8. Ossa Zebian says:

    First I have to say, this is such a useful site. Keep up the good work. This is my story. I just started to invest in stocks. I bought Suncor and Rogers. I bought 52 shares of rogers @ 38.70 and Suncor 40 shares @ 27.80. I did not put alot of money into these stocks. I want to keep rogers long term because they look like they are going to be the giants of the telecommunication sector in the future. I want to collect dividends off of them and reinvest but after doing calculations I will probably have enough for just one dividend per quarter. That is really not that much. Is a good strategy to keep rogers as a long term investment and buy shares on a monthly basis, and make it like a RRSP. As for suncor, that was a stock i wanted to keep cuz it was a good value stock and if it goes up to 35 bucks a share I will sell that and put that into a better dividend paying stock

  9. These are some great insights :) Thanks guys!

    I have SLF at quite a high price (I think i bought some last January to fill my TFSA) and am contemplating buying some more.

    SLF seems to be restructuring and reorganizing too.

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