Desjardins Upgrade Desjardins Securities analyst Doug Young predicts there could be “knee-jerk stock reactions” for Canadian lifecos on May 6 if first-quarter results are “noisy” given all four companies are hosting post-earnings conference calls.
“On that note, for MFC the net impact on headline EPS from shifts in rates was likely negative, driven by a steepening of the yield curve, despite higher absolute interest rates,” he said in a research report. “Otherwise, lifeco stocks increased 16.4 per cent on average in the quarter, outperforming the S&P/TSX (7.3 per cent) and the S&P/TSX Financials sub-sector (12.7 per cent).
“An improved 2021 macro outlook bodes well for the sector; however, we are not out of the woods yet given further lockdowns in Canada.”
Overall, Mr. Young is projecting a 31-per-cent year-over-year increase in core earnings per share, based on higher equity markets, interest rates and an “easy” comp from a weak quarter a year ago.
“For 2021 and 2022, we expect core EPS to increase by 12 per cent and 7 per cent on average, respectively,” he added. “As we look out to 2021, there are several drivers behind our core EPS growth expectations: (1) SLF — margin expansion at its U.S. group insurance operations, momentum in Asia, expense actions in Canada, higher contribution from SLC Management and potentially capital deployment (although we have not built any in); (2) MFC — momentum in Asia and wealth management, and expense efficiencies; (3) IAG — integration of acquisitions (specifically IAS in the US), organic growth, digital initiatives and leveraging improved distribution capabilities domestically; and (4) GWO — inclusion of MassMutual’s US retirement business, expense savings in the U.S. and Canada, and growth in Europe and CRS.
“Worth noting, a weaker U.S. dollar vs Canadian dollar and a potentially higher corporate tax rate could be headwinds for certain lifecos as we look out over the coming year. For perspective, the percentage of our 2021 headline earnings coming from the U.S. is as follows: 47 per cent for SLF, 30 per cent for MFC (excluding WAM), 12 per cent for GWO and 12 per cent for IAG.”
After raising his EPS projections to “factor in the positive impact of equity markets (versus lifeco expectations) and the mixed impact of interest rates,” Mr. Young made the following target price adjustments (in order of preference):
- Sun Life Financial Inc. (“buy”) to $72 from $69. The average target on the Street is $69.69.