Today, Definity Financial (TSE: DFY) reported that it has increased its stake in McDougall Insurance. It now has a 75% stake in the company (previously 25%). According to the press release, McDougall has a solid track record of growth and profitability. The deal also diversifies DFY’s operations, as it will receive distribution income. In addition, this is expected to be instantly accretive to DFY’s return on equity (ROE) and earnings per share (EPS) figures.
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DFY has C$251 million invested in the company, C$217 million of which came from today’s announcement, and it first invested in the company in 2017. McDougall is a large Canadian property and casualty insurance company with an annual premium base of about C$500 million.
Definity anticipates operating earnings before taxes and minority interests of over C$40 million annually from McDougall. This figure was just C$8 million in Fiscal 2021.
McDougall’s CEO commented, “We are excited to strengthen our partnership with Definity, which we believe will enable us to accelerate our growth plans and further our ambition to reach an annual premium base of $1 billion. This growth aspiration will provide more opportunities for our employees and also strengthen our value proposition for our customers.”
Is DFY Stock a Buy, According to Analysts?
Turning to Wall Street, DFY has a Strong Buy consensus rating based on seven Buys and two Hold ratings. However, the average Definity Financial stock price forecast of C$39.61 implies just 1.5% upside potential.
Does Definity Financial Pay a Dividend?
Definity Financial pays a dividend. However, it is relatively small. Its dividend yield is only 1.3%, meaning that most gains from this stock will have to come in the form of capital appreciation. As shown by the acquisition, DFY seems more focused on growing its business rather than paying out heavy dividends.
Nonetheless, in the most recent quarter, DFY reported a net income of C$21 million and paid out about C$14 million in dividends. Therefore, its dividend looks well covered at the moment.
Conclusion: An Accretive Deal, an Impressive Performance
Definity Financial’s partnership with McDougall Insurance looks promising, as it is expected to be an accretive one. Also, analysts are bullish, and this may cause them to raise their price targets. While the average price target implies very little upside potential, DFY stock is up 32% year-to-date and is still in an uptrend, meaning it can continue higher from a technical standpoint.
