On today’s Breakouts report, there are 51 stocks on the positive breakouts list (stocks with positive price momentum), and 53 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a dividend stock that analysts believe will rally to a record high – iA Financial Corporation Inc. (IAG-T). Currently, the share price is 8 per cent away from its all-time closing high. The stock has a unanimous buy recommendation from nine analysts and a 12-month forecast return of 19 per cent, not including the 2.8-per-cent dividend yield.
A brief outline on iA is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec-based iA Financial Corp. is a leading insurance and financial services company in Canada with operations across North America.
The company’s main operating segments include individual insurance, individual wealth management, group insurance, group savings and retirement and its U.S. operations. The company’s offerings include auto and home insurance, accident insurance, extended medical and dental care coverage, individual and group insurance, saving and retirement products including segregated funds that provide downside protection during market downdrafts, high interest savings accounts, and mutual funds.
Management is focused on growth.
On its earnings call, president and chief executive officer Denis Ricard highlighted management’s near-term priorities, “Right now, our focus is on organic growth, including investment in technology. Second, obviously, it’s about the dividends and we’re looking forward for the regulators to lift the restrictions on dividends. Once they do that, obviously, we’re going to resume or increase, and we’re strongly thinking about basing our dividend payout ratio based on the core earnings as opposed to the reported earnings - FYI. Also acquisitions, bolt-on acquisitions, we still have some in our baseline here but nothing major in terms of acquisitions at this point. And NCIB [normal course issuer bid i.e. share buybacks], opportunistic if, for any reason, there is an opportunity but it’s really the last resort.”
According to Bloomberg, the Caisse de dépôt et placement du Québec, considered an institutional investor with a long-term investment horizon, has an ownership position of over 9 per cent.
Investment thesis
- Seasoned management team with a disciplined growth strategy. CEO Denis Ricard has been with the company for 36 years.
- Industry leader. In Canada, iA is the leading individual insurance policy provider with a market share of roughly 21 per cent, according to the CEO.
- Solid financial results and positive earnings outlook. Last quarter, the company reported record core earnings per share.
- Strong balance sheet.
- Reliable dividend.
- Dividend growth.
- Reasonable valuation.
- Potential catalysts: 1) dividend hike announcement; 2) potential third-quarter earnings beat; and 3) large acquisition potentially announced in 2022.
Quarterly earnings results
Before the market opened on July 29, the company reported its better-than-expected second-quarter financial results with strength realized across of its business segments.
Core earnings per share came in at $2.29, up 34 per cent year-over-year, and above management’s guidance of between $1.95 and $2.10. EPS topped the consensus estimate of $1.97.
The company realized $673-million of net inflows into its segregated funds (up 61 per cent year-over-year) and $272-million of net inflows into its mutual funds (up 48 per cent year-over-year). The solvency ratio improved to 130 per cent, up from 128 per cent reported last quarter, and exceeded management’s target of between 110 per cent and 116 per cent. The leverage ratio was 23.6 per cent at quarter-end. As at June 30, the book value per share was $59.02, up 11 per cent year-over-year and up 4 per cent sequentially. Core return on equity (ROE) was 14.2 per cent. That day, the share price rallied 4.6 per cent.
Management targets delivering, on average, 10 per cent or more annual core earnings per share growth comprised mainly of organic, or internal, growth. In 2020, at the height of the coronavirus, core eps increased 9 per cent year-over-year.
Management’s goal is to report core ROE of between 12.5 per cent and 14 per cent in 2021, expanding to between 13 per cent and 15 per cent by 2023. In 2020, core ROE was 13.3 per cent.
At Scotiabank’s financial summit conference held on Sept. 9, Mr. Ricard said, “We are making strategic choices to optimize our capital position and also to get into businesses that are less capital intensive, for example. It leads to a position where we generate more excess capital, a higher ROE going forward, and a better return for shareholders at the end of the day.”
Before the market opens on Nov. 3, the company will be releasing its third-quarter earnings results. The consensus earnings per share estimate is $2.10.
Dividend policy
Due to COVID-19, the Office of the Superintendent of Financial Institutions (OSFI) placed restrictions on dividend increases by banks and insurers in March 2020. Once this restriction is lifted, a fair conclusion would be that iA Financial’s board of directors would approve a dividend hike.
Management aims to deliver consistent dividend growth. Currently, the company pays its shareholders a quarterly dividend of 48.5 cents per share, or $1.95 per share yearly, equating to an annualized dividend yield of 2.8 per cent.
Management targets a payout ratio of between 25 per cent and 35 per cent of reported earnings per share. However, an important change may be coming. A shift to core eps from reported eps is being considered, which would result in a higher quarterly dividend paid to its shareholders.
Analysts’ recommendations
This mid-cap stock with a market capitalization of $7.5-billion is actively covered by nine analysts, and all nine analysts have buy recommendations.
The firms providing recent research coverage on the company are: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Cormark Securities, Desjardins Securities, National Bank Financial, RBC Dominion Securities, Scotiabank, and TD Securities.
Revised recommendations
In July. eight of the nine analysts made minor increases revisions to their target prices
- BMO’s Tom MacKinnon to $85 from $83.
- Canaccord’s Scott Chan to $83.50 from $81.50.
- Cormark’s Lemar Persaud to $78 (the low on the Street) from $77.
- Desjardins’ Doug Young to $80 from $78.
- National Bank’s Gabriel Dechaine to $80 from $76.
- RBC’s Darko Mihelic bumped his target price to $81 from $78.
- Scotia Capital’s Meny Grauman to $90 (the high on the Street) from $88.
- TD Securities’ Mario Mendonca to $88 from $85.
Financial forecasts
The consensus earnings per share estimates are $8.23 in 2021, up from $7.12 reported in 2020, rising to $8.65 in 2022 and $9.24 in 2023.
Earnings forecast have been rising. To illustrate, three months ago, the Street was forecasting earnings per share of $7.84 in 2021 and $8.38 in 2022.
Valuation
The stock is commonly valued on a price-to-book basis as well as on a price-to-earnings (P/E) basis.
According to Bloomberg, the stock is trading at a price-to-book multiple of 1.4 times, relatively in-line with its five-year historical average. The stock is trading at a P/E multiple of 8.1 times the 2022 consensus estimate, which is slightly below its five-year historical average multiple of 8.9 times. Over the past five years, the stock has traded at a forward P/E multiple as high as over 11.5 times, suggesting there is room for multiple expansion.
The average 12-month target price is $83.06, implying the share price has 19 per cent upside potential over the next year. Individual target prices ares: $78 (from Cormark’s Lemar Persaud), two at $80, $81, $82, $83.50, $85, $88, and $90 (from Scotiabank’s Meny Grauman).
Insider transaction activity
Month-to-date, two management executives have reported trading activity in the public market.
In a relatively small transaction, on Sept. 22, executive vice-president of Group Benefits and Retirement Solutions Eric Jobin purchased 100 shares at a price per share of $69.83.
On Sept. 3, vice-president and corporate secretary Jennifer Dibblee exercised her options, receiving 4,000 shares at an average cost per share of approximately $48.38, and sold 4,000 shares at a price per share of $70.4132, leaving 2,819 shares in this particular account. Net proceeds totaled over $88,000, excluding any associated transaction charges.
Chart watch
The share price is finally trading close to its pre-COVID levels.
Year-to-date, the share price is up 26 per cent, outperforming both the S&P/TSX Financials Index with a gain of 23 per cent, as well as the S&P/TSX Composite Index, which is up 17 per cent.
In terms of key resistance and support levels, there is major overhead resistance between $75 and $76, near its record closing high of $75.99 reached in Feb. 2020, and its closing high in 2021 of $75.02 set on Aug. 16. After that, there is a ceiling of resistance around $80. Looking at the downside, the share price has initial technical support around $70, near its 50-day moving average (at $70.53). Failing that, there is support around $65, just below its 200-day moving average (at $66.50).
Please note that this report is not an investment recommendation.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Jennifer Dowty