Outperform the TSX with Sun Life Financial

Sun Life Financial is a leading international financial services organization. The company sells insurance, wealth and asset management solutions, and customized health programs to millions of consumers worldwide. It is a leader in US group benefits and insurance and wealth solutions in the Canadian market.

Sun Life’s balanced and diversified businesses consist of Asset Management (32% of Q3 2020 net income), individual insurance (26%), group insurance (25%), wealth (11%), and run-off (6%). It is also a leader in group asset management and a leading provider of defined contribution capital accumulation plans. The company has $1.2 trillion in assets under management.

Sun Life derives income from Canada (32% of Q3 2020 net income), U.S. (15%), Asset Management (32%), Asia (18%), and UK (3%). Sun Life has operations in 27 countries worldwide and works through a large network of advisors, 3rd-party partners, and distributors.

Nearly 70% of these advisors are licensed to sell both insurance and wealth solutions, which helps to deliver holistic financial planning advice to its clients. Sun Life has a huge customer base consisting of individuals, large and small businesses, and public and private sector companies.

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Revenue Growth & Market Exposure

Sun Life’s business is highly diversified by products, geographies, and client base which helps it to steer through market volatility and uncertainties. The company offers a broad range of protection and wealth products and services such as insurance, investments, advice, and asset management.

Asset management and individual insurance together accounted for more than 50% of the company’s net income in the last year. Canada is its largest and well-established market, with the company commanding leading market positions in group pensions, group benefits, and individual insurance. 

Sun Life has been around since 1865 and has developed a deep understanding of its clients’ financial needs. It is also improving the ease of doing business for its clients who can now reach the company through various touchpoints like mobile, online, by phone, or in person.

The company has digitized financial needs analysis, product illustration, application, and fulfillment processes in most of its Asian markets making it more convenient for its customers. Sun Life’s asset management business continues to post strong performance results driven by investment in institutional fixed income capabilities. As a trusted market leader offering a full suite of solutions, the company is in a good position to benefit from a rising aging population and the growing financial needs of customers. 

Sun Life’s revenues have grown at a rate of 9% CAGR in the last five years. Strong market growth, scale, and global presence in key markets continue to drive business growth. The company witnessed strong growth in all local as well as international insurance markets. 

Sun Life’s Q3 net income improved by 10% YoY, driven by favorable market and lower acquisition costs. It witnessed business growth, better results in its Canadian Group Benefits business, favorable morbidity experience in the U.S., and higher investing activity. Sun Life’s Asian net income also improved driven by favorable ACMA impacts and improved equity markets. It experienced net inflows of $4.5 billion in the global asset management business, with positive U.S. retail flows for the seventh consecutive quarter.

The company completed the acquisition of InfraRed Capital Partners and also announced its intent to purchase a majority stake in Crescent Capital which will further extend its platform to include alternative credit across public and private markets. More than 90% of all retail insurance applications were processed digitally in the quarter. Sun Life keeps investing in key technologies to drive global growth.

Dividends

Sun Life is a Dividend Aristocrat and sports a payout ratio of 54%. It has a dividend yield of 3.7%. The company last raised its dividend by 4.7% in 2019 and at a rate of 7.8% CAGR over the last five years. Sun Life returned over $1.9 billion of capital to shareholders through dividends and share repurchases in the last year. Its shareholder returns stood at 9% p.a. over the last five years. 

Sun Life has a sound track of successful acquisitions and integrations. Its recent acquisition of InfraRed and proposed Crescent Capital should broaden Sun Life’s suite of alternative investment solutions and alternative credit solutions, respectively. Sun Life’s business could suffer from a prolonged low-interest-rate environment, however, its business and geographical mix grant its relative stability.

Low financial leverage of 21.5% (below its long-term target of 25%) and $2.4 billion of cash provide additional flexibility to deploy capital in a disciplined manner. The company also has a well-diversified investment portfolio which is well-positioned for any downturn.

Sun Life is targeting 8%-10% EPS growth over the medium term and a payout ratio of 40%-50%, which should enable the company to raise its dividends comfortably going forward. The company has successfully exceeded these objectives in the last five years. Its LICAT ratio is also strong at 144%.

Past organic investments and growth opportunities in Asia should also support earnings growth. The company is well-positioned to leverage from growing trends of shifting demographics and digitization.

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Competition

Sun Life competes with the likes of leading Canadian insurance companies such as Manulife, Great-West Life, Industrial Alliance, and Intact Financial. The company faces intense competition from insurance companies, banks, asset managers, mutual fund companies, financial planners, and other service providers.

The company also faces constant headwinds from rapidly evolving technology, as a result of which several new entrants have emerged who use new and low-cost digital-based business models such as insurtechs and robo-advisors. A diversified and balanced business model, strong focus on clients, and a prudent risk profile differentiate Sun Life from its contemporaries.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:MFCMFCManulifeFinancial ServicesInsurance - Life0.6327.2842.259.319.312.930.04114.110.382341.120.066257Tollbooth - UnregulatedNONOYESNOCanada1
TSE:GWOGWOGreat West LifeFinancial ServicesInsurance - Life0.4833.5730.9810.5810.583.170.05225.220.552741.750.082037Tollbooth - UnregulatedNONOYESNOCanada1
TSE:POWPOWPower CorporationFinancial ServicesInsurance - Life0.5033.0120.5610.7210.723.080.05425.420.581241.790.086947Tollbooth - UnregulatedNONOYESNOCanada1
TSE:ELFELFE-L Financial CorpFinancial ServicesInsurance - Life0.31925.003.437.737.73119.680.00540.540.041845.000.005423Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

Sun Life is a leader in providing group benefits, group retirement services, individual insurance, and wealth management solutions. The company enjoys a leading position in key global markets. It is favorably placed to gain from a growing middle-class segment and emerging trends in the Asian markets.

Sun Life continues to solidify its position as the leader in Canada’s Group Retirement space with significant wins. Its organic investments and acquisitions should further help in driving earnings growth.

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.