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Manulife head office in Toronto
Manulife head office in Toronto

Eye on Equities

Lifecos healthier but dividend hikes may have to wait Add to ...

Shares in Canadian life insurance companies enjoyed strong upward momentum during the past quarter, with the sector outperforming both Canadian banks and the broader market by a wide margin. Manulife, which had been beaten up something fierce earlier in the year, led the charge with a 32.1 per cent rise.

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In a note today, Desjardins Securities Inc. analyst Michael Goldberg suggests the recovery is far from over, forecasting steadier earnings from the lifecos that will eventually bring their valuations close to those of the Canadian banks.

Just don't expect an increase in dividends for another couple of years.

"We believe the current and prospective economic environment will continue to push long-term interest rates and global equity markets higher - both of which are favourable for the lifecos," Mr. Goldberg said.

But payouts are unlikely to rise until earnings return to more stable levels and International Financial Reporting Standards rules are finalized, expected in early 2013, he said.

While Mr. Goldberg previously recommended selectively adding the lower-risk Canadian lifeco stocks, he now prefers those with greater sensitivity to long-term interest rates and global equity markets. "Overall, we would overweight Canadian lifecos and market weight Canadian banks," he said.

Upside: Mr. Goldberg rates both Great-West Lifeco Inc. and Sun Life Financial Inc. as a "hold", with price targets of $28.50 and $31, respectively. He has "buy" recommendations on both Industrial Alliance Insurance and Financial Service Inc. , with a price target of $40, and on Manulife Financial Corp. , with a $19 target.

Fortress Paper Ltd. is moving ahead aggressively on expansions, facility upgrades and efforts to improve profits, Dundee Securities Corp. analysts said after a meeting with senior management this week. Dundee also raised its forecast price for dissolving pulp prices for the next two years.

Upside: Dundee analysts Richard Kelertas and Liliana Tzvetkova hiked their 12-month target price by $8 to $70 a share.

Analysts are upgrading their price targets on Viterra Inc. after the grain handler this week reported fourth-quarter results that blew past consensus estimates and offered guidance that suggested strong performance in coming months.

Upside: CIBC World Markets Inc. raised its target by 50 cents to $13, Canaccord Genuity increased its forecast by $1.50 to $13.50, and TD Newcrest boosted its target by $2 to $13.50.

TD Newcrest analysts Vince Valentini and Eli Papakirykos expect Thomson Reuters Corp. to announce a dividend increase of up to 10 per cent and reveal favourable 2011 guidance when it releases fourth-quarter results on Feb. 10. The results should point to a pattern of accelerating revenue growth, they predict.

Upside: TD Newcrest maintained a $51 12-month price target.

Norbord Inc. shares have rallied 46 per cent since late August and are now fairly valued, considering its mid- and long-term earnings potential, said TD Newcrest analyst Sean Steuart. He expects the company will see a gradual earnings recovery over the next three years in tandem with a steady improvement in U.S. housing activity.

Downside: Mr. Steuart downgraded the stock to a "hold" from a "buy" but raised his target price by $3 to $17.

Zargon Oil & Gas Ltd.'s production in 2010 was below guidance and the company has curtailed capital spending for this year. While this will reduce cash flow, Zargon will benefit from a greater portion of its production coming from higher-priced crude oil instead of gas through 2012, said TD Newcrest analyst Roger Serin.

Downside: Mr. Serin cut his price target by 50 cents to $19.

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