Sunday, August 3, 2008

added more Sun Life

The nice thing about being a long term investor that focuses on dividends and dividend growth is that when stock prices go down yields go up. Canadian financial services firm Sun Life Financial (SLF) offered up a dividend yield of 3.7% this past week as the stock was sold off further after a negative earnings report due to U.S. operation weakness. The analyst downgrades, including Credit Suisse, also came right on cue which encouraged more selling.

When the smoke cleared toward the closing bell Friday I had to add to my position to lower my cost base. This was just too tempting to pass up:
  • As far as I can see, 3.7% is the highest this stock has ever yielded in its history
  • Earnings were up 6% in their Canadian operations within a tough market
  • The stock traded at these levels in late 2004 when the trailing 12-month earnings per share (EPS) was $2.88; trailing EPS is now $3.83
  • My valuation models using discounted cash flow (using an EPS growth rate of 9% and a P/E of 11x) show that the stock should be bought under a share price of about $45.00 (I bought today at about $38.60/share)
  • Price/Earnings ratio is right around 10x trailing earnings which has to be considered good value for a company with very low debt, a juicy yield, and a solid earnings and dividend growth history.

This purchase lowered my adjusted cost base (ACB) by about $3/share. Sun Life Financial (SLF) now makes up about 9% of my non-registered portfolio.


augustabound said...

Good call on Sunlife, I've been looking harder at it lately too.
In your valuation, what's your margin of safety to make it a buy under $45?

MG (moneygardener) said...

hi augusta, Everyone does this type of thing differently so I don't exactly know what you mean by margin of safety. Basically using a P/E of 11x and an EPS growth rate of 9%, I get $48.41 as a fair price to pay for Sun Life. So I guess $45.00 would be a margin of safety of 7% and the price i actually bought at ($38.60) would be a MOS of 20%.

Dividend Growth Investor said...


I think augusta is a value investor influenced by the works of Ben Graham and Warren Buffett.
As a dividend investor however, as long as your dividend payment keeps rising, who cares about margin of safety :-)

MoneyEnergy said...

Nice; I'd definitely like to get some more exposure to the lifecos myself... have been trying to decide which one.

Spruha Naik said...

It was such a confusing situation for me when I was looking for a finance advisor.

I am happy to have my perfect personal finance guide--my magazine-->MoneyLIFE.

And you know something, it is the first publication in India to introduce fund & stock screens with stock identifications through a well-tested & transparent method (& not through hunch, impression or gut-feel).

It's sharp analysis is empowering me to spend and invest my hard earned money smartly and wisely.

Everyone should get benefited from my Moneylife--

Anonymous said...

"The stock looks cheap but it is difficult to see the catalyst for reversal against peers given that the causes of recent relative earnings disappointments remain in place (deteriorating U.S. credit quality and higher credit spreads have been particularly negative relative to the company's Canadian peers). Positively, Sun Life remains highly capitalized, has exposure to large asset management businesses, and has well-positioned domestic group and wealth management platforms.

We are relatively more positive on the stocks of Industrial Alliance and Manulife (IAG.TO, $34.32, rated Outperform, Average Risk; and MFC.TO, $37.72, rated Outperform, Average Risk)."

Thicken My Wallet said...

I am curious why you hold both Manulife and Sunlife. It seems redundant to me. Since Manulife is traditionally considered the leader in the field, if it gets hit, Sunlife becomes collateral damage.

MG (moneygardener) said...

tmw, I have several redundancies in my potfolio. (MFC and SLF) (TD,BNS,RY,IGM)(PG and CLX). I'll bet that most Canadian investors have more duplication than I do. I am not so concerned about duplicating exposure like this. In the case of Manulife and SunLife, yes they are both Canadian financial/insurance firms but they do operate in some differing business concentrations and geographys. SunLife is actually quite strong in India. As a dividend investor I buy when value crops up and I try to pay less attention to diversification while I'm accumulating.

anon, catalysts are always difficult to see until they arrive. For the reasons that I've listed the stock is a buy in my opinion. Long term the catalysts will come. The stock will not trade a 10x earnings for the long term and I don't believe their next few earnings reports will be as bad as the stock is now reflecting.

augustabound said...

Sorry, I should have made my question more clear. If I understand you correctly then your DCF is your fair price.
That's why I like the blog and forum world, you get to see how different people do things and learn from them all.

@dividend growth, you assume correct my friend. I'm value first and dividend second. Well, I guess for me they go hand in hand. I like a nice dividend with a good price and rarely will I buy a company that doesn't yield. I want my yield on cost as high as possible to keep collecting the dividends until my days are done.

I used the term margin of safety mostly because I'm reading a book, and just finish a couple of others over the last month or so, that speak of the margin of safety.
Everyone has their own term and criteria for it though.

Yields on some of these companies are mouth watering, it's hard sometimes not to chase the yield alone.
Do you have a minimum yield that you want for an investment or is it more a company by company choice?

MG (moneygardener) said...

augusta, I'm not sure if your question was directed at me or dgi, but I'll answer anyway. I do not have a minimum yield level. Growth is what I'm after, but a high yield does help.

augustabound said...

Lol, sorry, again I was vague.
It was directed at you mg.
I asked because your holdings listed on your sidebar for your non-reg portfolio all seem like they yield well except WAG. But IIRC, they just increased about 20%.
Just curious as to others methodologies.
Sometimes I get hung up on a company, Petro Canada is one, that the yield is less than 2% so I hold off. For some reason I get hung up around 2%.

MG (moneygardener) said...
This comment has been removed by the author.
MG (moneygardener) said...

I can understand the 2% thing. I dropped FedEx from my watchlist for similar reasons. Sometimes a company like WAG is so attractive for other reasons that I make an exception. Also, as you've mentioned WAG's dividend growth has been very strong.