GREAT-WEST LIFECO INC. $27 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 950.6 million; Market cap: $25.7 billion; Price-to-sales ratio: 0.8; Dividend Yield: 4.6%; TSINetwork Rating: Above Average; www.greatwestlifeco.com) is Canada’s secondlargest insurance company after Manulife, with $545.8 billion of assets under administration. It also sells mutual funds and retirement planning and wealth management services. Power Financial Corp. (Toronto symbol PFC) owns 68.2% of Great-West.
Revenue fell 11.9%, from $33.9 billion in 2008 to $29.9 billion in 2011. That’s partly because low interest rates have cut the interest income the company earns on its investment portfolio. However, revenue rose 0.5%, to $30.1 billion, in 2012.
Earnings up despite uneven revenue
Earnings rose 16.5%, from $1.4 billion in 2008 to $1.63 billion in 2009. Because of more shares outstanding, per-share earnings rose just 10.3%, from $1.56 to $1.72. In 2010, earnings fell to $1.70 a share (or a total of $1.62 billion) but improved to $2.13 a share (or $2.0 billion) in 2011.
In 2012, earnings fell 10.3%, to $1.91 a share (or $1.8 billion). If you disregard the cash that Great-West set aside to settle a lawsuit, earnings per share would have risen 3.5%, to $2.05 in 2012 from $1.98 in 2011.
The company has a history of buying distressed firms. In 2007, it bought U.S. mutual fund company Putnam Investments. This business has struggled further in the wake of the 2008/2009 stock market downturn, but the purchase gave Great-West an opportunity to sell insurance and other products to Putnam’s large client base.
Irish Life has strong potential
Great-West’s latest acquisition is Irish Life Group Ltd., Ireland’s largest pension manager and life insurance provider, with $50 billion of assets under management.
The government of Ireland purchased Irish Life in June 2012, after its former parent company, Irish Life & Permanent, ran into financial difficulty. Great-West will pay $1.75 billion for Irish Life when the deal closes later this year. To help pay for this purchase, Great-West will sell $1.25 billion of new common shares at $25.70 each. That will increase the number of shares outstanding by 5%.
Big purchases like this add risk. However, Great-West has operated in Ireland for over 100 years. Moreover, the company expects to save around $52 million a year by combining Irish Life’s computer systems and offices with its own operations. These savings should help boost Great-West’s annual earnings by $215 million, starting in 2014.
Dividend hike seems likely in 2014
The new operations should push up Great-West’s earnings to $2.20 a share in 2013. The stock trades at just 12.3 times that forecast. However, the company will probably wait until it fully integrates Irish Life before it raises its $1.23-a-share dividend, which yields 4.6%.
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