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Great-West Lifeco Stock: Reliable, Potentially Undervalued
Stock Analysis & Ideas

Great-West Lifeco Stock: Reliable, Potentially Undervalued

Story Highlights

Great-West Lifeco is one of many big, reliable Canadian financial companies. Based on its dividend yield, current valuation, and analyst price targets, the stock may be worth looking into for investors that are interested in relatively-safe stocks.

Great-West Lifeco (TSE: GWO) is one of the three big Canadian life insurance firms. With just under half of the firm’s profit and revenue in Canada, Great-West also operates in the U.S. and Europe. 

GWO’s share price is down roughly 13.5% year-to-date and down approximately 8.2% in the past year (not including dividends). Nevertheless, it may be undervalued at the moment.

Valuing Great-West Lifeco

To value GWO, I will use the excess returns model. This approach is more appropriate for financial companies because they tend to have volatile free cash flows. As a result, trying to create forecasts for them is futile. The excess returns model allows us to use historical numbers instead, which are actual results. There are a few steps to follow for this valuation method.

First, you calculate a company’s excess returns. Next, you calculate the terminal value. Add them up, and you get your valuation. Here’s how it works:

Excess Returns = (Average ROE – Cost of Equity) x Book Value Per Share
Terminal Value = Excess Return / (Cost of Equity – Growth Rate)
Fair Value = Book Value Per Share + Terminal Value

I will use the following assumptions for my calculations:

Average ROE: 12.9% (five-year average)
Cost of Equity: 8.9% (value taken from Finbox)
Book Value: C$26.18
Growth Rate: 3.4% (using the 30-year Government of Canada yield as a proxy for long-term growth expectations)

Now that I have my assumptions, let’s plug them into the formulas:

C$1.05 = (0.129 – 0.089) x C$26.18
C$19.09 = C$1.05 / (0.089 – 0.034)
C$45.27 = C$26.18 + C$19.09

As a result, I estimate that Great-West Lifeco is currently worth C$45.27 per share under current market conditions.

Dividend

For income-oriented investors, GWO pays a 6.06% dividend yield on an annualized basis. When taking a look at GWO’s historical dividend yield, you can see that it has remained relatively flat:

At 6.06%, the current yield is near the middle of the range, indicating that income-oriented investors are paying a fair price relative to yields they have been able to receive in the past.

Analyst Recommendations

Great-West Lifeco has a Hold consensus rating based on six Holds and one Sell assigned in the past three months. The average Great-West Lifeco price target of C$39.17 implies 24% upside potential.

Final Thoughts

GWO is a reliable company that may be trading at a discount based on analyst estimates and the excess returns valuation model. As a result, investors may want to consider GWO stock for their portfolios.

Disclosure

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