Tuesday, January 24, 2012

Great-West Lifeco Inc

I do not own this stock (TSX-GWO). However, I own its parent stock of Power Financial (TSX-PWF). The ultimate parent company is Power Corp (TSX-POW). I had owned for many year IFM Financial, another stock of the Power Financial family, but recently sold it and reinvested the into Power Financial as a way to rationalize my portfolio.

The Power Financial Corp is a company that has many fine financial companies under its umbrella. As with all the companies under Power Financial Corp, this company pays good dividends. The 5 and 10 year growth in dividends is still at 5.8% and 12.2% per year despite the fact that the dividends have not been increased since 2009.

All life insurance companies are having a current hard time because of the low interest rates. It is hard to say when this will change. The current 5 year median Dividend Payout Ratios are 70% and 25% for earnings and cash flow. I would suspect that they will have to go lower for the dividend to increase. The expected DPRs for 2011 will be around 63% and 22% for 2011, which is lower than the 5 year median rates, but I do not think quite low enough for a dividend increase.

If you had held this stock over the past 5 years, you would not have made any money, despite the fact this the company was paying you dividends worth 4.3% per year. Over the past 10 years, you would have made between 6 and 7% per year, with dividends payments some 4.5% of your return.

Since the annual statements for December 2011 are not in, I am dealing with those from December 2010. Revenues are up somewhat over the last 5 and 10 years. Revenues per shares have growth of 3.4% and 4.4% per year over the past 5 and 10 years. Growth in revenues this year is expected to be slightly negative.

Earnings growth over the past 5 years is negative and over the past 10 years is up just 7.6% per year. EPS is expected to growth around 12% for 2011. Cash flow growth over the past 5 and 10 years is 6.6% and 7.2% per year. Cash Flow is expected to come in lower in 2011.

Book Value growth has also been low recently, especially the last 5 years at 4.5% and 9.5% per year over the past 5 and 10 years. However, Book Value is expected to be up sharply in 2012 under the new accounting rules.

This is a financial company and as such the debt ratios are different than a lot of companies on the TSX. The current Asset/Liability Ratio is 1.11 and the current Leverage and Debt/Equity Ratios are 11.41 and 10.25. These are what you expect.

When I look at insider trading, I find some $5.5M of insider selling and some $16M of insider buying. All the selling occurred before April 2011 and the buying occurred later. All the selling was by the CFO and officers of the company. All the buying was by directors. For this company, CEO, CFO, officers and other employees have lots more stock options than shares. It is the opposite for the directors.

There are institutions that hold shares in this company, but they hold only 6.4% of the shares. Over the past 3 months they have bought and sold shares in this company and have reduced their ownership by just over 8%. (Note that this company’s is mostly owned by Power Financial Corp.)

I get 5 year median low and high Price/Earnings Ratios of 12.55 and 16.34. The current P/E ratio of 10.48 is therefore low. (However, note that in other financial crisis, Life Insurance companies and banks go P/E ratios below 9.00 at lowest points, so this stock may not yet be as low as it can go.)

I get a Graham Price of $26.63 and a current stock price of $22.43. The current stock price is some 15% lower than the Graham Price. The stock price for this stock has seldom been below the Graham Price and the 10 year median low difference is the stock price being 24% higher than the Graham Price.

I get a 10 year median Price/Book Value Ratio of 2.96 and a current one of 1.39, which is just under 50% of the 10 year median ratio. The current dividend yield of 4.48 is some 17% lower than the 5 year median of $4.65. However, the last few years have seen the dividend yield much higher than historically, where the historic dividend yields has been closer to 3%.

By all measures, the current stock price is low, but it is low for a good reason. Life Insurance companies are not doing well and people do not expect them to do well for some time. However, this could mean that buying them for the long term can be smart, as long as the companies have no trouble recovering, and it would seem that most Canadian Life Insurance companies will recover.

When I look at analysts’ recommendations I find Strong Buy, Buy, Hold, Underperform and Sell. It all depends on your perspective. No one expects this company to recover quickly, but everyone expects it to at some point. The consensus recommendation is a Hold. With a Hold recommendation comes a 12 month stock price of $24. Analysts believe that the current dividend is safe and that it has done better than other life insurance companies in Canada. Even an analysts with a do not buy rating says he thinks that the stock is oversold.

So, if this stock is a buy or not depends on your objectives. It will not recover in the short term, but everyone thinks it will in the longer term.

Great-West Lifeco is a financial services holding company with interests in the life insurance, health insurance, retirement savings, investment management and reinsurance businesses. The Corporation has operations in Canada, the United States, Europe and Asia through The Great-West Life Assurance Company, London Life Insurance Company, The Canada Life Assurance Company, Great-West Life & Annuity Insurance Company and Putnam Investments, LLC. Lifeco and are members of the Power Financial Corporation group of companies. Its web site is here Great-West. See my spreadsheet at gwo.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

1 comment:

  1. I tend to invest in companies that I affect my life in some way. Since my work uses GWO for insurance I decided to have a small position.

    My sister who works in a dental office says they are a real miser when it comes to covering the costs so my position will remain small for a while.