On today’s Breakouts report, there are 34 stocks on the positive breakouts list (stocks with positive price momentum), and four stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a dividend stock that is on the cusp of appearing on the positive breakouts list – iA Financial Corporation Inc. (IAG-T). The share price has been staging a strong rally in recent months. Quarter-to-date, the share price is up 14 per cent.
A brief outline on iA is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Quebec-based iA Financial Corp. is a leading insurance and financial services company in Canada with operations across North America. The company’s main operating segments include individual insurance, individual wealth management, group insurance, group savings and retirement, and its U.S. operations. The company’s offerings include auto and home insurance, accident insurance, extended medical and dental care coverage, individual and group insurance, saving and retirement products including high interest savings accounts and mutual funds.
According to Bloomberg, the Caisse de dépôt et placement du Québec, an institutional investor with a long-term investment horizon, has an ownership position of over 9 per cent.
- Seasoned management team with a disciplined growth strategy. CEO Denis Ricard has been with the company for 37 years.
- Industry leader. In Canada, iA is a leading individual insurance policy provider with over four million clients.
- Solid financial results and positive earnings outlook. Management targets core earnings per share annual growth of over 10 per cent, on average, mainly from organic (or internal) growth.
- Strong balance sheet.
- Reliable and attractive dividend. Currently yielding 3.7 per cent.
- Dividend growth. In July, the company announced an 8 per cent dividend increase.
- Reasonable valuation.
- Potential catalyst: capital deployment resulting from the accounting transition to IFRS (International Financial Reporting Standards) 17 in 2023.
- Key potential risks to consider: 1) economic recession and 2) stock market weakness.
Quarterly earnings results and outlook
Before the market opened on July 28, the company reported better-than-expected second-quarter financial results.
Core earnings per share came in at $2.37, up 3 per cent year-over-year and above management’s guidance of between $2.20 and $2.35. Earnings per share also topped the consensus estimate of $2.07.
Given the challenging market conditions, the company realized $390-million of net inflows into its segregated funds (down 42 per cent year-over-year from $673-million reported during the same period last year) and $237-million of net outflows from its mutual funds. The solvency ratio was 130 per cent, down from 132 per cent reported last quarter and unchanged from last year. This exceeded management’s target of between 110 per cent and 116 per cent. The leverage ratio was 23.7 per cent at quarter-end. As at June 30, the book value per share was $60.97, up 3 per cent year-over-year. Core return on equity (ROE) over the trailing 12 months was 14.1 per cent. That day, the share price rallied 5.6 per cent.
Management targets delivering, on average, 10 per cent or more annual core earnings per share growth comprised mainly of organic, or internal, growth. Between 2015 and 2021, core EPS expanded at a compound annual growth rate of 11 per cent. In 2020, at the height of the coronavirus pandemic, core EPS increased 9 per cent year-over-year.
For 2022, management’s goal is to report core ROE for the trailing 12 months ranging from 13 per cent to 15 per cent,
At Scotiabank’s Financials Summit held on Sept. 8, CEO Denis Ricard remarked on the upcoming accounting transition to IFRS 17, “The big thing about iA going towards the IFRS 17 and this is very important to understand, it’s probably the most important thing to understand today out of everything I’m going to say, is about capital. Because at the end of the day, capital is king and the end result of the implementation of IFRS 17 is that not only is it favorable on EPS, not only it’s favorable on the ROE, but most importantly, it’s going to be very favorable on excess capital. So, we have about $600-million of excess capital and it’s going to go up to $2-billion at the transition to IFRS 17. So, now we understand that my biggest challenge as a CEO is how to deploy that capital.”
He added, “We are a company that is generating a lot of excess capital. We are sitting on a huge amount of capital that was kind of a great reward for us for all the years in the past where we managed this company, I would say, conservatively or with prudence.”
Before the market opens on Nov. 9, the company will be releasing its third-quarter earnings results. The consensus earnings per share estimate is $2.24.
Returning capital to shareholders
Management aims to deliver steady dividend growth. In July, management announced an 8 per cent dividend increase, raising its quarterly dividend to 67.5 cents per share or $2.70 per share yearly. This equates to a current annualized yield of 3.7 per cent.
Management targets a payout ratio of between 25 per cent and 35 per cent of core earnings per share.
In the second quarter, the company repurchased 1,181,314 shares as part of its share buyback program.
This mid-cap stock with a market capitalization of $7.75-billion is actively covered by nine analysts, of which eight analysts have buy recommendations and one analyst (CIBC’s Paul Holden) has a ‘neutral’ recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Cormark Securities, Desjardins Securities, National Bank Financial, RBC Dominion Securities, Scotiabank, and TD Securities.
Since the release of the company’s quarterly earnings results in July, seven of the nine analysts made relatively minor revisions to their target prices – all higher.
- BMO’s Tom MacKinnon to $88 from $87.
- Canaccord’s Scott Chan $81.50 from $77.
- Cormark’s Lemar Persaud to $86 from $73.
- Desjardins’ Doug Young to $78 from $76.
- National Bank’s Gabriel Dechaine to $81 from $78.
- RBC’s Darko Mihelic to $88 from $86.
- TD Securities’ Mario Mendonca to $84 from $81.
The consensus earnings per share estimates are $8.66 in 2022 and $9.18 in 2023.
Earnings forecast have increased for 2022 but moderated slightly for 2023. To illustrate, three months ago, the Street was forecasting earnings per share of $8.44 in 2022 and $9.27 in 2023.
The stock is commonly valued on a price-to-book basis as well as on a price-to-earnings (P/E) basis.
According to Refinitiv, the stock is trading at a price-to-book multiple of 1.1 times the 2023 consensus estimate. According to Bloomberg, the stock is trading at a P/E multiple of 8 times the 2023 consensus estimate, below its seven-year historical average multiple of 8.8 times and below its peak forward P/E multiple of just under 12 times during this time period. This suggests there is room for multiple expansion.
The average 12-month target price is $82.72, implying the share price has 13 per cent upside potential over the next year. Individual target prices are as follows: $73 (from CIBC’s Paul Holden), $78, $81, $81.50, $84, $85, $86 and two at $88 (from BMO’s Tom MacKinnon and RBC’s Darko Mihelic).
Insider transaction activity
Quarter-to-date, only one insider has reported trading activity in the public market.
Between Aug. 3-10, executive vice-president and chief growth officer Mike Stickney exercised his options, receiving a total of 7,500 shares at a cost per share of $35.51, and sold 7,500 shares at an average price per share of approximately $70.05, leaving 42,300 shares in this particular account. Net proceeds totaled roughly $259,000, excluding any associated transaction charges.
The share price has been staging a strong rally in recent months. Quarter-to-date, the share price is up 14 per cent, making it the seventh best performing stock out of the 29 members in the S&P/TSX Financials (sector) index.
Year-to-date, the share price is relatively flat, up just 1 per cent but outperforming both the S&P/TSX Financials (sector) index as well as the S&P/TSX composite index, which are down 8 per cent and 6 per cent, respectively.
In terms of key resistance and support levels, there is an initial ceiling of resistance between $75 and $76. After that, there is major resistance around $85. Looking at the downside, the share price has initial technical support around $68, near its 50-day moving average (at $68.19). Failing that, there is strong technical support around $60.
ESG Risk Rating
According to risk provider Sustainalytics, iA Financial has an ESG risk score of 21.1 as of June 5, 2022. A risk score between 20 and 30 reflects a ‘medium risk’ rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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