Great-West Lifeco (TSX:GWO) just reported solid Q1 2022 earnings results. The shares have been on a downward trend over the past three months, and investors are wondering if GWO stock is now undervalued.
Great-West Lifeco operations
Great-West Lifeco is a financial services holding company based in Winnipeg. The asset portfolio includes life insurance, health insurance, retirement, and investment services, along with asset management and reassurance operations.
The company’s subsidiaries serve 33 million customers in Canada, the United States, and Europe, operating under the brands Canada Life, Empower, Putnam Investments, and Irish Life.
Great-West Lifeco is a part of the Power Corp group of companies.
Great-West Lifeco Q1 2022 earnings
Great-West Lifeco generated Q1 2022 base earnings of $809 million for the quarter, up 9% from the same period last year. On a per-share basis, Great-West Lifeco reported base earnings of $0.87 compared to $0.80. Europe and the United States delivered better results compared to the first three months in 2021. Canadian operations saw earnings dip. Weak equity markets and a strong Canadian dollar led to a 4% dip in assets under administration.
Great-West Lifeco generated a Q1 return on equity of 14.7%. That was up from 13.6% on a year-over-year basis.
Great-West Lifeco remains well capitalized with a LICAT ratio 119%. This is near the high end of its target level and comfortably above government requirements.
Dividends
Income investors like Great-West Lifeco for its generous distribution and attractive dividend yield. The company raised the payout by 12% late last year. The current quarterly distribution of $0.49 per share provides an annualized yield of 5.6% at the time of writing.
Great-West Lifeco is targeting a dividend-payout ratio of 45-55% of base earnings. If earnings growth continues along the 9% range for the year, investors should see another decent increase for 2023.
In the event that things get ugly and global equity markets continue to correct in the coming months, the dividend should still be safe.
Outlook
The jump in life insurance claims due to the pandemic should drop in 2022 and 2023, as more people build immunity through vaccines and exposure to the virus. Regarding the wealth and asset management side of the business, weak equity markets could put added pressure on results in the near term.
On the positive side, upward movements in interest rates should benefit the insurance businesses by enabling them to earn better returns on the cash they have to set aside to cover potential claims.
Great-West Lifeco continues to make strategic acquisitions to drive growth. The company recently closed its US$3.55 billion purchase of Prudential’s full-service retirement business in the United States. The deal, made by the Empower subsidiary, adds 4,300 workplace savings plans and US$314 billion in assets under management. The Empower division in the United States should get an additional US$325 million in after-tax earrings by the end of 2023. Earnings per share accretion is targeted at 8-9% on a run-rate basis by the end of next year. As a result, Empower’s contribution to Great-West Life’s earrings is expected to grow by 30% by the end of 2023.
Should you buy Great-West Lifeco stock?
The stock looks undervalued today at $35 per share. Great-West Lifeco traded as high as $41 in February. Management expects to deliver 8-10% annual base earnings per share growth over the medium term and 14-15% base return on equity. That’s pretty good guidance.
Investors searching for solid dividend stocks for a portfolio focused on passive income might want to consider buying Great-West Lifeco on the pullback.
