Investors who are heavily weighted towards Canadian financial stocks are having a good week. In case you missed it, the Office of the Superintendent of Financial Institutions (OSFI) gave financial companies the green light to raise dividends once again. It is yet another reason to be bullish on insurance and financial service companies like Sun Life Financial (SLF). (See Analysts’ Top Stocks on TipRanks)
The OSFI provides the regulatory framework for deposit-taking institutions and oversight over most Canadian financial institutions. Dividend raises and share buybacks had been frozen seen the onset of the pandemic. Despite strong quarters from companies in the industry, it took the OSFI more than a year to lift these caps.
The announcement, which came earlier this month, was proceeded by a flurry of dividend raises – Sun Life included.
Big Dividend Raise
On November 8, this leading insurance company announced a one-time, supplementary dividend of C$0.11 per share. Combined with its previously declared dividend of $0.55 per share, shareholders are effectively receiving a 20% bump to their quarterly income.
Is the raise a permanent one or just temporary? Since Sun Life had already reported Q3 2021 results and declared its quarterly dividend, it couldn’t re-declare a new one. Therefore, what investors are seeing is the declaration of supplementary dividends, which will eventually turn to a more permanent raise.
While the company wasn’t as explicit in this area as some of the others, there is no reason to expect the dividend of $0.66 per share won’t be the new one moving forward. How can we be sure? Here is an extract from their press release:
“Sun Life has demonstrated a strong track record of delivering shareholder value and progressive dividend increases. The company remains committed to its dividend payout ratio of 40 – 50% as part of the company’s medium-term financial objectives.”
On a forward basis, a dividend of $0.66 per share would only account for ~40% of Fiscal 2022 estimates of $6.68 per share. This is at the low end of expectations.
The raise will effectively extend the company’s dividend growth streak to seven years.
Strong Q3 Results
Circling back to Q3 2021 results, Sun Life delivered an excellent quarter. Earnings of $1.54 per share beat by $0.02 and represented 6.7% growth over Q3 of Fiscal 2020.
Assets under management grew to $1.39 billion, up 15.7% year-over-year, and the company exited the quarter with a very strong financial position.
Sun Life had a Life Insurance Capital Adequacy Test (LICAT) ratio of 143%, far above the OSFI requirements for 100% of total capital. It exited Q3 with $2.8 billion in cash and other liquid assets.
Overall, there wasn’t much not to like about Sun Life’s performance. The markets agree as the company’s current share price is close to all-time highs of $57.93 per share.
Plenty of Potential Upside Left
Financials have been struggling to gain momentum in these low-rate environments. This is especially true of insurance companies as lower spreads negatively impact earnings.
However, with interest rates expected to rise in coming years, now is their time to shine. Despite a strong performance this year in which Sun Life’s stock is up by ~30%, I believe there is still plenty of upside.
The insurer is only trading at 10.5 times forward earnings. Stripping out the past few years when valuations were depressed, Sun Life averaged a forward P/E ratio north of 12. Given our current environment, I’d expect Sun Life’s valuations to be trading near these levels again.
Wall Street’s Take
Turning to Wall Street, Sun Life Financial earns a Moderate Buy consensus rating based on nine Buys, one Hold, and only one Sell rating.
The average Sun Life price target of $63.10 implies 13.7% upside potential.
Disclosure: At the time of publication, Mat Litalien did not have a position in any of the securities mentioned in this article.
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