Weak quarter, no dividend hikes expected from lifecos

Investors looking for dividend hikes from Canada’s life insurance sector are likely to be disappointed when companies report results for the second quarter of 2011. Lifecos are expected to report weaker-than-normal earnings as both equity markets and interest rates declined in the quarter.

Andre-Philippe Hardy, an analyst at RBC Capital Markets, expects a strong recovery in 2011 and 2012 earnings when compared to 2008 and 2009. However, he does not expect the rebound to be sufficient enough for boards to move to raise dividends this quarter.

“The prospects for dividend increases remain sparse near term, in our view,” Mr. Hardy told clients.

If one name were to surprise the market with a dividend hike, the analyst said it would be Industrial Alliance Insurance and Financial Services Inc. It has a payout ratio that is lowest of the group, and a business model and reserving practices that have led to more stable earnings than its peers, he noted.

Mr. Hardy’s 2011 earnings estimates suggest payout ratios for the group ranging from 30% at Industrial Alliance to 61% at Great-West Lifeco Inc.. For 2012, they range from 28% to 52%, respectively.

The analyst said Manulife Financial Corp. and Sun Life Financial Inc. should be particularly hard hit by declines in equity markets and lower interest rates in the second quarter.

The S&P/TSX composite index declined 5.8%, the S&P 500 dell 0.4% and Japan’s broad TOPIX index dipped 2.3%.

“Equity market declines should negatively impact earnings through lower fee income for all four lifecos, and additions to reserves at Manulife and Sun Life,” Mr. Hardy said, forecasting a negative earnings per share impact of 14¢ for Manulife and 10¢ for Sun Life.

Lower government interest rates and tighter corporate spreads are expected to have a negative 6¢ per share impact for both Manulife and Sun Life.

However, the analyst anticipates that credit costs will continue to be low, except for Great-West Lifeco Inc., given its exposure to European financials and sovereign debt.

He added that the 6.2% average year-over-year decline in the U.S. dollar versus the Canadian dollar is a negative headwind to core earnings growth.