A Yield to Caution: Brompton Lifeco Split Corp.

Article Excerpt

BROMPTON LIFECO SPLIT CORP. $5.74 (Toronto symbol LCS; Shares outstanding: 8.2 million; Market cap: $47.0 million; Dividend yield: 15.3%; www.bromptongroup.com) holds shares of Canada’s four largest publicly listed life insurance companies . These are Sun Life Financial, Manulife Financial, Great-West Lifeco and iA Financial. The company holds the four stocks on an approximately equal-weighted basis. Lifeco Split yields a very high 15.3%. However, its income does not cover those high distributions to its shareholders. To make up the difference, it must realize capital gains on its securities. But those gains are far from guaranteed, so it supports its distributions by selling call options on the stocks it holds. Selling call options also generates an income stream for Lifeco Split. However, these sales tend to limit any capital gains that its portfolio might otherwise generate. That’s because when the stocks it owns go up, holders of any call options on those stocks will buy them from the trust at the agreed upon price. That means the company…