Great-West Lifeco Inc.: An Interesting Opportunity

Great-West Lifeco Inc. (TSX:GWO) shares are currently at a 52-week low and trade at a very reasonable earnings multiple. Value investors, take notice.

| More on:

Great-West Lifeco Inc. (TSX:GWO) is Canada’s second-largest publicly traded life insurer, trailing behind only Manulife Financial Corp. It has insurance operations across Canada, the United States, and Europe, as well as wealth management divisions in each of these locations.

The company’s shares aren’t doing so well lately, recently plunging to lows not seen since 2o14. This is partially because of Manulife’s latest earnings, which were lower than analyst expectations and revealed anemic investment returns. Investors aren’t very excited about the insurance business in general, concerned that prolonged low interest rates will really take a bite out of profitability.

But are things really so dire? I don’t think so. Here’s the case for loading up on one of Canada’s top financial companies while the price is low.

Still solid earnings

I can understand why investors are bearish on the insurance industry. Companies take in premiums that likely don’t have to get paid out for years. They then invest those premiums–usually in bonds–and pocket the interest gained as profit. It’s a good business model–at least in a world with decent interest rates.

Great-West is still managing to invest those premiums profitably, even if it can’t get as much interest as it would like. Management is also focusing on growing its European division, including making an acquisition in Ireland. That should help the bottom line as well.

Over the first six months of 2016 profits came in at $1.30 per share, compared to $1.36 last year. Nobody wants to see profits decline year over year, but Great-West’s earnings are still pretty good.

Analysts project the company will end up with earnings of $2.68 per share, meaning they expect the rest of the year will be a little better than the first half. And 2017 is expected to be better with net income growing to $2.92 per share.

This gives the company a P/E ratio of 11.7 times 2016’s projected earnings. That’s a pretty solid valuation in today’s world.

Good balance sheet

Investors don’t have to worry about the health of Great-West’s balance sheet. It’s healthier than ever. Its Minimum Continuing Capital Surplus Requirements ratio stood at 232% as of June 30. Any number over 100% is deemed to be acceptable by OSFI.

This kind of financial flexibility gives management a few different options. It can seek potential acquisitions, as it did recently when it made a small deal in Europe to bolster operations there. Management is also buying back shares at a fairly aggressive pace; almost six million shares have been eliminated.

Solid dividend growth

Great-West isn’t just spending its cash on share buybacks. It continues to give investors attractive dividends with good dividend growth.

The company currently pays $0.35 per share quarterly, which is good enough for a 4.4% yield. That dividend is higher than both of its main rivals’, Manulife and Sun Life Financial, which pay 4.3% and 3.9%, respectively.

Great-West also has good dividend growth, at least lately. The dividend was frozen at $0.31 per share for years before the company finally gave investors a two-cent-per-quarter raise in 2015. And 2016 saw another two-cent-per-share raise.

With a payout ratio of 51.7% today, the company should be able to give investors dividend raises annually for the next few years at a minimum, especially now that the board of directors has made dividend growth a clear priority.

Should you buy?

Great-West is a solid operator with a good valuation in a sector that investors don’t particularly like right now. Shares are trading at lows not seen since 2014, which is usually a pretty good time to pick up a company with a solid history of outperformance.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Dividend Stocks

money goes up and down in balance
Dividend Stocks

This 6% Dividend Stock Is My Top Pick for Immediate Income

This Canadian stock has resilient business model, solid dividend payment and growth history, and a well-protected yield of over 6%.

Read more »

ways to boost income
Dividend Stocks

1 Excellent TSX Dividend Stock, Down 25%, to Buy and Hold for the Long Term

Down 25% from all-time highs, Tourmaline Oil is a TSX dividend stock that offers you a tasty yield of 5%…

Read more »

Start line on the highway
Dividend Stocks

1 Incredibly Cheap Canadian Dividend-Growth Stock to Buy Now and Hold for Decades

CN Rail (TSX:CNR) stock is incredibly cheap, but should investors join insiders by buying the dip?

Read more »

bulb idea thinking
Dividend Stocks

Down 13%, This Magnificent Dividend Stock Is a Screaming Buy

Sometimes, a moderately discounted, safe dividend stock is better than heavily discounted stock, offering an unsustainably high yield.

Read more »

Canadian Dollars bills
Dividend Stocks

Invest $15,000 in This Dividend Stock, Create $5,710.08 in Passive Income

This dividend stock is the perfect option if you're an investor looking for growth, as well as passive income through…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

3 Compelling Reasons to Delay Taking CPP Benefits Until Age 70

You don't need to take CPP early if you are receiving large dividend payments from Fortis Inc (TSX:FTS) stock.

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

Better Dividend Stock: TC Energy vs. Enbridge

TC Energy and Enbridge have enjoyed big rallies in 2024. Is one stock still cheap?

Read more »

Concept of multiple streams of income
Dividend Stocks

Got $10,000? Buy This Dividend Stock for $4,992.40 in Total Passive Income

Want almost $5,000 in annual passive income? Then you need a company bound for even more growth, with a dividend…

Read more »