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Number Cruncher

Cheap insurers with dividend firepower Add to ...

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Reasonably priced life insurance companies, with some dividend growth in mind.

What we found

Canadian life insurers are heading into the second half of the year stronger, with market volatility waning and earning power strengthening, according to Desjardins Securities analyst Michael Goldberg.

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“We believe that the lifecos remain largely undervalued as their recovery lags that of the banks,” he wrote in a research report, where he called Canadian insurers’ valuations “compelling.”

“Our benign view of the lifecos is based on our expectation that bond yields are more likely to trend higher than lower in the coming months.” Higher interest rates, which can eat into bank earnings, are positive for insurers.

Insurance companies are due to start reporting second-quarter earnings in coming weeks, starting with Industrial Alliance Insurance and Financial Services Inc. on July 29. Earnings across the sector are not yet generally high or stable enough to support the resumption of second-quarter dividend increases, Mr. Goldberg said.

The only exception is likely to be Industrial Alliance, which will probably increase its quarterly dividend to 26 cents a share from 24.5 cents, he said. Even then, its payout ratio would fall below its objective of 25 to 35 per cent.

Industrial Alliance’s stock price is low, close to its 2010 year-end embedded value of $41.56, compared to an estimated embedded value of $47 a share for 2011, Mr. Goldberg said. Embedded value refers to the present value of future profits plus adjusted net asset value. He has a $44.50 target price on the stock.

Manulife Financial Corp. may provide two pleasant surprises that its stock price doesn’t reflect – higher-than-expected second-quarter earnings and a dividend in the near future, he said.

“MFC’s low relative valuation may underestimate its potential to be the next lifeco to reach capital deployment mode,” he said, pointing out that the insurer trades at 9.7 times 2011 earnings. The insurer reports earnings on Aug. 11.

Mr. Goldberg has “buy” ratings on both Industrial Alliance and Manulife. He has a $21 price target on Manulife.

Rival Great-West Lifeco Inc. has not raised its annualized dividend of $1.23 since the second quarter of 2008. The insurer’s earnings per share probably have to reach about $2.50 before it increases the payout, so investors should not expect a hike this year or next, Mr. Goldberg said. He rates the stock “hold,” with a $30 target price.

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