2023-11-01 09:02:42 ET
Summary
- Sun Life Financial (SLF) hold/neutral rating from June reaffirmed.
- Positives are a 5% dividend yield and growth, top line revenue growth.
- Offsetting factors include declining profitability, overvaluation, and declining equity.
- A preview of upcoming Q3 earnings on Nov. 13th was discussed.
Research Note Summary
In today's note I make a return to the insurance sector again after a hiatus, to revisit a Canada-based stock I previously covered, Sun Life Financial ( SLF ).
I last covered this stock back in July, and now am back for its 3 month review. Since my last note on this stock when I gave it a hold/neutral rating , the share price has seen a retreat of 13.6%.
After applying my updated methodology today, I still got the same outcome and will be reaffirming my neutral /hold rating on this stock again.
Driving this rating are positive points such as 5% dividend yield, 3 year dividend growth, a recent business acquisition, and YoY revenue growth.
Some offsetting factors include YoY profitability declines, overvaluation, underperformance vs the S&P500, falling equity and cashflow.
A key downside risk discussed was rising interest costs.
Methodology Used
My WholeScore Rating methodology looks at this stock holistically across multiple categories including key risks, and assigns a rating score. I exclusively cover stocks and foreign ADRs that are dividend-paying and trade on major US exchanges only (NYSE, Nasdaq).
Some of the data comes from the most recent FY23 Q2 results from Aug. 8th, while the forward-looking preview relates to the upcoming Q3 earnings results expected on Nov. 13th, in just a few weeks.
Growth vs Industry Peers
In putting together a peer group within the life and health insurance sector to compare this stock against, I chose a group of 7 very large companies based in the US or Canada, trading on major exchanges, and whose primary business is insurance but who may also be involved in annuities and retirement solutions.
In this peer group, Sun Life unfortunately came near last in terms of YoY revenue growth, and underperforming the peer average by 13.8%, missing my goal.
Sun Life - growth vs industry peers (author analysis)
The big revenue winner in this peer group is New Jersey-based Prudential Financial ( PRU ).
To understand this sector, before investing in it, I simplify it down to the following: these companies get a pile of cash each year mostly from insurance policy premiums, invest a large portion of it into fixed-income securities and other assets that earn money, and manage risk in such a way that there is a lot more money coming in than is going out to pay valid insurance policy claims.
In periods when an unusually high number of claims are filed, they take a financial hit. However, in periods of high interest rates as we see now, they can earn a lot more on their fixed-income securities, but also can see interest-expenses rise on their corporate debt / borrowing.
One call out to mention about Sun Life, in terms of forward-looking growth potential, is a recent acquisition they made in the health space. I think this buyout will expand their business going forward but also provide extra diversification beyond just insurance, retirement and annuities.
According to their Q2 earnings release :
We're excited about our announcement to acquire Dialogue Health Technologies, Canada's leading integrated health platform that provides access to affordable, on-demand, quality care. Our investment in Dialogue allows us to play a larger role in Canada's health ecosystem, while reducing the strain on traditional health care organizations.
Financial Statements
When it comes to the company's income statement , balance sheet , and cash flow statement , Sun Life in the most recent reported quarter of Q2 saw a 6.2% YoY revenue growth, easily beating my goal of 5%.
However, it did not do so well on profitability, seeing a 30% YoY decline and missing my goal there.
Sun Life - financial statements (author analysis)
Also, as these are all figures that came out after my last rating on this stock, I am disappointed to say that this company saw an 87.8% YoY decline in free cashflow per share, but also a 19% decline in equity.
In researching what were some key drivers of the net income declines, I discovered that within corporate/other expenses the company saw losses "driven by higher operating expenses including incentive compensation and an increase in debt financing costs," according to the Q2 figures / comments.
In addition, their Canada business saw lower reported net income "reflecting market-related impacts primarily from interest rate movements and real estate returns."
Dividends
When it comes to dividends , the picture is more rosy, as you can see from my table below.
For one thing, when comparing the dividend amount from Aug. 2023 to that of Aug. 2020, it saw a 34% growth in this 3 year period.
Sun Life - dividends (author analysis)
The dividend yield of almost 5% is almost 19% above the sector average, beating my target goal by a lot.
In the last quarterly commentary, there was no indication of a dividend hike soon, so we can expect the same rate going into Q3 earnings results in a few weeks.
With a dividend 3 year growth, steady payouts, and 5% forward yield, I would think about this stock as a dividend income play as a quarterly cashflow opportunity.
Share Price vs Moving Average
My current portfolio strategy as mentioned in recent articles is to find crossovers below the 200-day moving average I am tracking, as a potential buying price.
Note that I said potential buying price, which does not necessarily mean a buy rating, since the final rating is based on the holistic picture overall.
According to my table below, the current share price as of the writing of this article is 7.5% below the moving average, so in my opinion it presents a nice price dip that could be taken advantage of.
Sun Life - share price vs moving avg (author analysis)
It is impossible to say with certainty what the price will do in a year, or 5 years, so my portfolio goal remains to minimize downside risk and maximize upside potential. If you look at the yChart above, all of the last several price dips were followed by a nice rebound back above the moving average, creating a decent price spread.
Performance vs S&P500 Index
As a potential investor in this stock for my portfolio of financial sector stocks, I am interested in the market momentum of this stock price in comparison to the S&P500 index which I believe is a prominent index tracked by the financial media and analysts.
In my table below, using official data from Seeking Alpha , it appears that Sun Life has a positive 1 year price return however it is 29% below the return of the S&P500, so it missed my goal this time unfortunately.
Sun Life - performance vs S&P500 (author analysis)
In my opinion, the bearish market momentum in this sector is tied to the overall bearish sentiment on financial sector stocks since March.
For example, consider that their large peer Metlife ( MET ) was nearly tracking the S&P500 index until about March when it dropped off a cliff:
Metlife - comparison to S&P500 (Seeking Alpha)
I think when market momentum returns to the overall financial sector, it should pull up these insurers as well. I can understand the market's concern lately over banks and insurance companies exposure to commercial real estate, office properties, bonds declining in value, and downgrades from ratings agencies.
Valuation and ROE
From the table, it is evident that the valuation metrics of forward P/E ratio and forward P/B ratio point to a highly overvalued stock.
The return on equity , however, points to being above the sector average, which could be a positive sign I think.
Sun Life - valuation (author analysis)
In understanding the high P/E ratio, it seems to be more impacted by the "E" or "earnings part of it, with earnings seeing a serious YoY decline.
The high P/B ratio is likely impacted by the YoY drop in equity, lowering book value.
This also may be impacting the return on equity, making it higher than average. Consider that its peer Metlife has an ROE of just 0.85%, and that of Prudential ( PRU ) is 7%.
I expect when its equity rises again, this should normalize its valuations and ROE closer to the sector average.
Key Risks
The key risk I have found is a rising trend in interest expenses for this firm when comparing the quarter ending June with the one ending in Dec 2021.
In fact, interest costs rose 65% in this period it seems. This can impact net income as it affects the cost side of the income statement, and with the current high interest rate environment not expected to cool off just yet, and CME Fedwatch predicting the Fed policy rate staying the same even after the Fed's Dec. 13th meeting, I would consider this something to keep an eye on as it could present a downside risk .
Sun Life - growth in interest expense (Seeking Alpha)
On the bright side, the long-term debt has seen a YoY decline of 21%, which is significantly a positive point and step in the right direction.
Sun Life - long term debt (Seeking Alpha)
In compiling a risk score, in the table below, I have determined the the risk impact is medium and probability medium/high, so it is just within my risk tolerance goal.
Sun Life - risk score (author analysis)
As for upside risk , keep in mind that a major point of attraction to this firm could be its strong LICAT ratio, which is Canada's insurance regulator OSFI's test for life insurance capital adequacy.
According to the Royal Bank of Canada , the supervisory ratio should be 100%, and Sun Life has a ratio of 148%, so well above the regulatory target. I think this could be appealing to opportunistic investors looking for a well-capitalized insurer at a cheaper share price.
WholeScore Rating
Today, this stock got a WholeScore of 5, earning a neutral / hold rating by me today.
Sun Life - WholeScore (author analysis)
In comparison to the ratings consensus on Seeking Alpha, it seems that I am being less bullish than the quant system and Wall Street.
Sun Life - rating consensus (Seeking Alpha)
My Forward-Looking Sentiment
To put it bluntly, though I like the insurance sector as a portfolio strategy, this particular stock seems more like a dividend income play, particularly at a 5% dividend yield and strong 3 year dividend growth.
Though it has further growth and diversification potential with its recent acquisition in the health space, it is still lackluster on growth among its large insurance peers, and mediocre on profitability growth.
Looking forward to the preview of Q3 results in a few weeks, I expect more headwinds on interest expenses, and hopefully an effort to contain costs more.
I will be adding this one to my "dividend quick picks" of the week.
For further details see:
Sun Life Financial: Neutral Rating Maintained, A 5% Dividend Yield Quick Pick