Sun Life Financial Inc. (NYSE: SLF) is BUY. We believe that SLF remains attractively valued at current prices based on the company’s consistently strong earnings and ROE that has been above the peer average and management’s guidance. The company is diversified, with Canadian, U.S., and Asian insurance operations, as well as a money management arm. Sun Life has recently made several small acquisitions that should help to boost EPS, and is generating solid results from its investment holdings. Our new target price is $52, raised from $50.
The beta on SLF is 1.04.
Sun Life Financial Inc. is based in Toronto, and reports its results in Canadian dollars. On November 4, the company reported that underlying EPS rose 5% year-over-year to $1.44. In U.S. dollars, at the average 3Q exchange rate of CAN$1/US$0.75, the company posted EPS of $1.08. Underlying ROE for the quarter was 15.1%, above management’s medium-term target range of 12%-14%, but down from 15.5% a year earlier. Book value rose to CAN$38.17 per share from CAN$34.56 in 3Q19.
Sun Life has a growth-via-acquisition strategy. At the beginning of the quarter, Sun Life completed the purchase of 80% of InfraRed Capital Partners, an investment manager, for $390 million. InfraRed is based in London and manages $12.0 billion in real estate and infrastructure investments. The firm will be part of SLF’s SLC Management, the new $171.0 billion alternative asset unit, which did not have an infrastructure team. Sun Life will also commit $400 million to InfraRed’s U.S. renewable energy investments.
EARNINGS & GROWTH ANALYSIS
Sun Life reports results in five divisions: Canada (33% of underlying income); U.S. (15%); Asset Management (33%); Asia (19%) and Corporate, which usually has net losses. Fiscal 2Q20 results by segment are summarized below:
In the Canadian segment, (Individual Insurance & Investments, Group Benefits, and Group Wealth), underlying third-quarter net income rose 9% from prior year to CAN$293 million. This was driven by a 65% increase in wealth sales, partly offset by a decrease of 28% in sales of insurance products.
In the U.S. segment, (Group Benefits, International and In-Force Management), third-quarter underlying net income rose 1% to CAN$136 million. U.S. insurance sales of $230 million were up 25% from prior year despite the challenging environment.
In the Asset Management group, underlying net income rose 17% to CAN$294 million. AUM at quarter-end totaled CAN$1.18 trillion, with 64% retail and 36% institutional. The segment pretax operating margin was 40%, flat with 3Q19.
The Asian segment reported underlying net income of CAN$164 million, up 19% from the prior year.
FINANCIAL STRENGTH & DIVIDEND
The company’s financial strength is rated AA by S&P 500 and AA3 by Moody’s Corp.
Sun Life pays a dividend. We think that the dividend is secure and expect it to grow.
MANAGEMENT & RISKS
The CEO of Sun Life is Dean Arthur Connor. He was appointed president and CEO in 2011 and has been with the firm since 2006. The CFO is Kevin Strain. He was appointed to the post in 2017 and has been with the company since 2002. William D. Anderson is the chairman of Sun Life Financial.
Management has targeted an operating return on equity of 12%-14% and underlying EPS growth of 8-10%. To reach its goals, it has implemented a plan focusing on ‘four key pillars of growth.’ These four strategic goals are to:
Lead the Canadian insurance and wealth management markets.
Become a leader in U.S. group benefits and international wealth management.
Investors in the SLF shares face numerous risks.
Equity Risk: Management has estimated that a 50-basis-point increase in interest rates could boost SLF’s net income by CAN$50 million, but that a 50-basis-point decrease could reduce its net income by CAN$100 million.
Real Estate Risk: The company is exposed to real estate risk through fluctuations in the value of owned property or indirectly through fixed-income investments secured by real estate.
Insurance Risk: SLF is exposed to risks when the actual performance of its products differs from expectations with regard to morbidity, longevity and catastrophic events.
Currency Risk: Adverse currency movements may negatively impact results from global operations. We note that U.S. investors are exposed to changes in the USD/CAD exchange rate.
We note that Sun Life does not report operating earnings under U.S. GAAP and does not treat realized capital gains and losses in a manner similar to that of U.S. companies. As a result, its historical and estimated earnings may not be comparable to those of diversified U.S. life companies. Its results also tend to be more volatile and subject to revision than those of U.S. companies.
Sun Life Financial Inc., based in Toronto, is a leading life insurance company with operations in Canada, the U.S. and Asia. The company distributes its insurance products and other financial services through direct sales agents. Sun Life also operates MFS Investment Management. The company has 22,700 employees.
From a technical standpoint, prepandemic the shares had been in a bullish pattern of higher highs and higher lows that dated to 2016.
On November 19, BUY-rated SLF closed at $45.09, down $0.22.