TipRanks Smart Dividend Newsletter – Edition #20
Hello and welcome to the 20th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is one of the world’s largest insurers, who is also highly competent at investment and wealth management. Its strong market presence, high profitability, and outstanding dividend yield make it one of the most compelling investments in the financial sector.
But first, let us present a brief investment thesis, supporting our recommendation.
Investment Thesis: Value for Money
The prognosis for the global economy is uncertain as the world has hit a tough patch. Everyone, whether an individual or a large enterprise, is searching for security during these trying times and is more concerned with securing their future.
And this is the point at which the value of insurance really stands apparent. In the insurance industry, being able to anticipate, manage, and reduce risks can mean the difference between success and failure.
Insurance is a safety net, not merely a policy contract. In order to act as that safety net, an insurer needs to project unwavering stability that is backed by solid resources and a spotless reputation. People and businesses are willing to pay a hefty premium for an insurer in these uncertain times.
Add to it the ability to offer comprehensive financial advisory services and investment & asset management, and insurance companies can be a 360 degree financial safety proposition. When backed by robust financial health, an optimistic future outlook, and alignment with shareholder interests, such a company presents a very compelling investment case. A very high dividend yield strengthens that case even more.
Quality Dividend Stock: This Week’s Top Pick
Sun Life Financial Inc. (SLF) is a Canadian financial services company and is one of the world’s largest insurers.
Sun Life offers its services through four main divisions: Insurance – including life, health, wellness, disability, critical illness, stop-loss and long-term care insurance; Investments – including mutual funds, segregated funds, annuities and guaranteed investment products; Advice – including financial planning and retirement planning services; and Asset management – including pooled funds, institutional portfolios and pension funds. SLF works with individuals and corporate clients in Canada, the U.S., the U.K., Asia, and globally. Sun Life’s shares have been trading on the Toronto (TSX), New York (NYSE) and Philippine (PSE) stock exchanges since March 2000.
Sun Life was founded in 1871 in Montreal, Quebec, as The Sun Insurance Company of Montreal. By the end of the 19th century, it had expanded to various international markets, having begun its first U.S. operations in 1895. During the post-war period, the company’s successful business strategies made it one of the top corporations in Canada, as well as a global player in the life insurance field. In 1978, the company moved its headquarters to Toronto, Canada’s main business hub.
In the 1980s, SLF expanded its activities, entering the wealth management business with the acquisition of Massachusetts Financial Services (MFS), the Boston-based investment management and mutual fund company. In the past decades, the company continued to expand its business portfolio and geographical presence through numerous acquisitions across sectors such as Asset Management, Real Estate Funds, SaaS and others. Its most recent purchases include Dialogue, Canada’s premier health and wellness virtual care platform, in August 2023; Advisors Asset Management (AAM), a U.S. investment management firm, in October 2022; and DentaQuest, the second-largest dental insurance provider in the U.S., in November 2021.
Today, SLF is a Fortune Global 500 company, commanding a market capitalization of $28.4 billion and a workforce of 52,500 employees in 28 offices in different regions, serving more than 85 million clients. Its wealth protection divisions have $1 trillion in assets under management (AUM).
The company derives 41% of its net income from wealth and asset management, 27% from individual insurance, and 32% from group insurance. Geographically, Sun Life derives 34% of its net income from Canada, 23% from the U.S., and 14% from Asia; the Asset Management division, responsible for 29% of net income, is reported as global.
This balanced and diversified business model, coupled with geographical diversification, provides income visibility and insulation against downturns in one of the company’s markets. SLF’s fast expansion is supported by its strategy focused on leveraging secular global trends, such as demographic shifts in developed markets, digital acceleration, adoption of digital health technologies, growth of alternative asset classes, etc.
Sun Life’s business model’s strength is reflected in its stellar financial health. While the company’s total debt-to-equity ratio is a low 30%, SLF has more cash than its total debt. Debt is covered by operating cash flow many times over. The company’s debt is highly rated by the global credit rating agencies: “AA” at S&P Ratings and “Aa3” at Moody’s. Moreover, the company’s current ratio of 51.7 and quick ratio of 47.1 point to an outstanding level of solvency, while its cash ratio of 4.8 reflects exceptional liquidity.
Furthermore, SLF’s capital efficiency metrics compare well with its peers. Its Return on Equity (ROE) of 13.7% is more than twice the average for the industry, while its Return on Assets (ROA) of 1%, albeit low compared to the general market, is similar to the industry median. Sun Life’s profitability is reflected in its industry-beating margins. The company’s gross margin of 48%, operating margin of 12%, and net profit margin of 10%, are significantly higher than the industry averages.
Sun Life Financial Inc. has been growing revenues at a CAGR of 6% in the past decade; the low revenue growth is due to the highly cyclical nature of its business, which saw a revenue decline in the past two years (on an annual business). However, the company’s operational excellence has allowed it to increase its net earnings through different stages of the cycle, with EPS rising at a CAGR of 8.5% in the past three years.
In Q2 2023, Sun Life surpassed analysts’ estimates and its own outlook, reporting 14% year-on-year growth in underlying net income. The growth was led by a surge of income in the insurance business, while wealth & asset management declined year-on-year. Earnings-per-share rose 3.3% year-on-year, after having risen +5.6% in the previous quarter and +10.5% in the quarter before that. The company has surpassed analysts’ EPS estimates in all quarters for which these estimates were available, with the sole exception in Q1 2021.
Sun Life’s robust financial health and strong performance support its strategy of returning capital to its shareholders. The company has paid quarterly dividends since 2000, continuously raising them from 2002 until the onset of the Covid-19 crisis, when the cash payments were cut but swiftly returned to growth in Q2 2020. Dividend per share grew at a CAGR of 9.8% in the past three years and at a CAGR of 7.2% in the past decade. The latest dividend increase was in May 2023, when the payout rose by 4%. While these dividend growth rates may seem low, it would be difficult to expect faster growth as Sun Life’s dividend yield of 4.5% is already more than twice the average for the Financial sector. Meanwhile, despite the very high yield, the payout ratio remains a modest 46%, indicating that the company has sufficient resources to continue raising dividends while retaining enough capital to invest in business growth.
In addition to dividends, SLF returns capital to its shareholders through buybacks on an opportunistic basis. Following the strong Q2 2023 results, the company’s management announced plans to purchase 17 million shares, or about 3% of its common shares outstanding, in the coming year (up to August 20, 2024). It is Sun Life’s first share repurchase announcement since 2019.
Taking into account robust finances, sturdy earnings growth, strong market position, an optimistic outlook, and generous shareholder compensation, it’s no surprise that SLF’s stock has been outperforming its peers, as represented by the SPDR S&P Insurance ETF (KIE), and even the S&P 500 (SPX) in the past year. That compares positively to SLF’s less volatile, but also less inspiring performance in the past. SLF has risen by 17.5% in the past three years, versus SPX’s 48% and KIE’s 43%. In the past 12 months, SLF has jumped by 21%, while the S&P 500 rose by 19% and the ETF increased by 14%.
As a result of the recent outperformance, Sun Life is now trading on the more expensive side of the financials’ valuation range. Its TTM P/E of 12.9 and Forward P/E of 11.6 represent a 38% and 24% premium to the sector’s average. However, the Financial sector includes many struggling small and regional banks, whose shares tumbled this year, taking valuations down to the low single digits. When compared to its peers in the Canadian and U.S. insurance industry, SLF looks quite reasonably priced, slightly below the industry’s average.
The outlook for SLF is positive, as TipRanks’-scored top Wall Street analysts see an average upside of 15.7% for the stock in the next 12 months. SLF’s stock has a TipRanks’ Smart Score rating of “Perfect 10” with a “Strong Buy” recommendation:
To conclude, we believe that Sun Life Financial, with its highly efficient business model, excellent execution, robust profitability, and expanding business portfolio, is well positioned to continue rewarding its shareholders in the years to come. Therefore, we view SLF as a compelling income investment stock and a valuable addition to any long-term investment portfolio.
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