During the recent, dramatic sell-off in the equity markets, I screened for non-resource stocks with sharp price declines to identify potential buying opportunities. Among the steep decliners was Sun Life Financial, which is discussed below.
The company
Sun Life is an international financial services company that offers a range of protection products and services such as life, health, dental and disability insurance, as well as wealth products such as mutual and pooled funds; annuities; savings, retirement and pension plans; and education savings plans.
Operationally, the company delivered solid second-quarter financial results on Aug. 5. Here are some of the highlights.
Sun Life reported earnings per share of $1, above the Street's expectations of 83 cents. Return on equity (ROE) improved to 13.9 per cent from 12.9 per cent in the prior year. The cash position was $1.7-billion at its holding company, well above management's minimum cash target of $500-million. The firm's capital position improved, with the minimum continuing capital and surplus requirements increasing to 223 per cent. During the quarter, Sun Life announced two acquisitions, strengthening the firm's asset management business segment.
Listed below are a few reasons why investors may want to consider accumulating shares of Sun Life on a pullback.
- First, management remains committed to growing earnings and expanding ROE. Management’s medium-term earnings growth objective is between 8 per cent and 10 per cent. Management’s medium-term targeted ROE range is between 12 per cent and 14 per cent.
- Second, management continues to expand its asset management business. In 2015, management has announced three acquisitions, and given the company’s strong balance sheet, management has the financial capacity to make additional acquisitions that will be accretive to earnings and expand the firm’s ROE.
- Third, management is committed to returning capital to shareholders. Management recently raised the dividend and has been actively repurchasing shares.
- Finally, operations in Asia, while still relatively small, continue to grow at a blistering rate. Sun Life Asia represented 11 per cent of underlying net income in the second quarter, and earnings grew 82 per cent year-over-year.
Headwinds for the company include the low interest rate environment as well as the steady outflows from MFS Investment Management. MFS, representing 27 per cent of underlying net income, experienced net outflows of $1.8-billion (U.S.), as retail net inflows were more than offset by outflows on the institutional side.
Dividend yield
Earlier this year, management announced a 6-per-cent increase to the quarterly dividend, to 38 cents per share from 36 cents per share. The current yield is 3.6 per cent. The company's solid balance sheet can support the dividend.
Valuation
The stock is trading at a price-to-earnings multiple of 11 times the 2016 consensus earnings estimate. This is at a discount to the three-year historical average P/E of 11.5 times, and at a slight premium to its five- and 10-year historical average P/E multiples of 10.4 times.
There is room for P/E multiple expansion as the company delivers steady growth in earnings and ROE.
Chart watch
Year-to-date, the stock price has been relatively unchanged. The stock price reached a 52-week high of $45.28 on Aug. 11, falling 13 per cent to $39.26 on Aug. 24, creating an attractive buying opportunity.
Technically, there is resistance at $42 and then $42.50 at its 50-day moving average. There is downside support at $40.87, at its 200-day moving average, and failing that at $40. The relative strength index is showing the stock is relatively neutral at current levels, neither technically overbought nor oversold.
For patient investors, the long-term chart suggests the stock price could revisit the $50 level in time.
The is also downside support from the normal-course issuer bid program. Last quarter, 2.2 million shares were repurchased. Management was also active during the first quarter, repurchasing 3.1 million shares.
Analysts' recommendations
There are 10 analysts with "buy" recommendations, seven analysts have "hold" recommendations and one analyst has a "sell" recommendation. One-year price targets range from $41.90 to $52. The average one-year price target is $47.73, equating to a potential price return of approximately 14 per cent.
Analysts have been revising their 2015 and 2016 earnings estimates up. The consensus earnings estimate is $3.60 for 2015 and $3.82 for 2016, implying growth of 6 per cent.
The bottom line
Should market volatility cause the stock price to drift back down, I would recommend accumulating shares near or below the $40 level.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com