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Hi Lou,

Was wondering what do you think of Sun Life Financial. If they do cut their dividend, will it affect their stock price?

Also, what are the chances that they will reduce their dividend, given that Manulife paid dearly for doing that?

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Thanks,

Cedric



Hey Cedric,

Thanks for the assignment. Sun Life Financial Services of Canada Inc. is under pressure but they are not alone. The insurance industry as a whole is struggling with the poor returns on invested capital arising from market conditions since the fall of 2008.

In an effort to maintain its dividend the company announced that it will be exiting some businesses in the United States including the sales of variable annuities and individual life insurance. Those steps reported in December of 2011 did not prevent Standard and Poor's from putting a watch on SLF's debt rating with negative implications.

You asked what would happen if the company cut it is dividend? Without a doubt it would sell off. Currently the yield is 7.2 per cent which is way ahead of what is being offered by similar companies. If you want to see the comparables go to Globeinvestor.com and look at the competitors tab for SLF. In order to get in line with the dividend paid by competitors the stock has to gain over $6.00 a share or the payout has to go down.

Management is always reluctant to cut dividends but in the face of the inevitable the bitter medicine is taken. Basically you can't keep paying out if you are not bringing it in!

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A review of the charts will help identify the trend that is in play and possible outcomes for the stock.

What the three-year chart illustrates is a stock with a defined downtrend that started in February of 2011 when it hit a 52 week high of $34.39.

If you look closely at the chart there is a double top that formed signalling that it was time to get out of Dodge. By July of 2011 a death cross had formed and the shares breached support at $28.00. By the fall of 2011 support at $24.00 broke, evidence of continued weakness.

The six-month chart indicates that there has been some buying that came in at $18.00 but the volume has thinned out. Volume has not been greater that the three month average volume for the last 15 trading days. Generally I like to see a move up confirmed by increasing volume.

In addition, the MACD and RSI are indicating that the advance is weakening at this time. Overall I would not be chasing this stock. The trend is down, there is a death cross on the chart, volume is thinner than I would like, and the dividend is rich compared to its peers. These are not reasons to be a buyer.

Make it a profitable day and happy capitalism!

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Have your own question for Lou? Send it in to lschizas@globeandmail.com.

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