GREAT-WEST LIFECO INC. $22 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 949.8 million; Market cap: $20.9 billion; Price-to-sales ratio: 0.7; Dividend Yield: 5.6%; TSINetwork Rating: Above Average; www.greatwestlifeco.com) is Canada’s largest insurance company, with $523.6 billion of assets under administration. It also sells mutual funds and retirement planning and wealth management services. Power Financial Corp. (Toronto symbol PFC) owns 68.2% of Great-West.
Top brands are a big plus
In Canada, the company sells its products under several well-known banners, including Great West Life, Canada Life and Freedom 55. The Canadian division supplies 51% of Great-West’s earnings.
The company’s European division (32% of earnings) mainly sells group insurance and annuity products in the U.K., Ireland and Germany. It also sells reinsurance products to other insurers.
In the U.S. (17% of earnings), Great-West is a leading provider of employer-sponsored retirement savings plans. This division also owns Putnam Investments, a major U.S. mutual fund company.
Low interest rates weigh on revenue
Great-West’s revenue rose from $25.9 billion in 2007 to $33.9 billion in 2008, partly due to the acquisition of reinsurance accounts in Europe. However, low interest rates have reduced the interest income the company earns on its investment portfolio. That’s one reason why its revenue fell to $29.9 billion in 2011.
Earnings rose 3.5%, from $1.95 billion in 2007 to $2.0 billion in 2008. Great-West sold $1 billion of new common shares to improve its balance sheet in the wake of the 2007/2008 financial crisis. Because of more shares outstanding, per-share earnings fell 4.6%, from $2.41 to $2.30.
In 2009, earnings fell to $1.72 a share (or a total of $1.6 billion), but improved to $2.00 a share (or $1.9 billion) in 2011.
Great-West’s investment portfolio has little exposure to the debt problems in Europe. As of June 30, 2012, European government bonds accounted for just 1.8% of its investment holdings, and bonds issued by European banks represented just 1.1%. Great-West has no direct exposure to Greece.
Big drop in mutual fund redemptions
The company is also seeing better results at its Putnam mutual fund business in the U.S. Net redemptions fell to $300 million U.S. in the second quarter of 2012 from $2.0 billion U.S. in first quarter.
Today’s low interest rates require Great-West to set aside more funds to cover future payouts to policyholders. Even so, its balance sheet comfortably exceeds the minimum regulatory requirements.
That should let Great-West maintain its $1.23- a-share annual dividend, which yields 5.6%. Moreover, the stock trades at just 10.7 times the $2.05 a share that the company should earn in 2012.
Great-West Lifeco is a buy.
