GREAT-WEST LIFECO INC. $16 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 943.9 million; Market cap: $15.1 billion; Price-to-sales ratio: 0.6; SI Rating: Above Average) is Canada’s largest insurance company. Great-West administers $339 billion worth of assets. The company also offers wealth-management services. It operates in Canada (55% of its earnings), Europe (35%) and the U.S. (10%). Power Corp. (Toronto symbol POW) owns 72.7% of Great-West’s shares.
In August 2007, Great-West paid $4.2 billion for U.S.-based mutual-fund manager Putnam Investments. Buying Putnam gave Great-West an opportunity to cross-promote its products to Putnam’s large base of individual and institutional clients.
The stock market downturn has lowered the value of Putnam’s assets. This hurts Putnam’s earnings, since its fees rise and fall with the value of the securities in its funds. Moreover, the market’s volatility has caused many of Putnam’s clients to redeem their funds. Consequently, Putnam’s assets under management fell 27% in 2008, to $129 billion U.S. from $176.7 billion U.S. in 2007.
As a result of the drop in the value of Putnam’s assets, Great-West wrote down the goodwill related to the purchase of the mutual fund company by $1.35 billion. (Goodwill is the difference between the purchase price and the value of the tangible assets purchased.) This action had no effect on Great-West’s cash holdings of $2.85 billion, or $3.02 a share.
If you exclude the Putnam writedown, Great-West’s 2008 earnings rose 3.5% to $2 billion, or $2.26 a share, from $1.95 billion, or $2.19 a share, in the prior year. Gains at its Canadian (up 3%) and European operations (up 19%) helped offset a 16% drop at the American businesses. Revenue rose 30.9%, to $33.9 billion from $25.9 billion, due to the addition of Putnam.
The stock trades at 7.0 times the $2.29 a share the company will likely earn in 2009. Great-West’s $1.23 dividend yields 7.7%.
Great-West Lifeco is a buy.
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