Great-West Lifeco: Dividend Track Record Threatened

Serious uncertainties about its credit exposure and the prospects for Boston-based money manager Putnam Investments in a weak economy have prompted Desjardins Securities to downgrade Great-West Lifeco Inc. (GWLOF.PK).

These issues may pose the biggest threat to the 15-year track record of dividend growth at Canada’s second largest life insurer by market value, analyst Michael Goldberg told clients. Great-West has been increasing its dividend at least semi-annually since 1993.

On Thursday, Great-West said its quarterly profit dipped 5% as a result of charges for impaired assets and the liquidation of the Putnam Prime Money Market fund.

While the company’s conference call raised several issues about potential credit risks, it did hold its quarterly dividend at C30.75¢, which Mr. Goldberg expects will be increased next quarter.

He had forecast a negative impact of C15¢ related to credit issues and C12¢ from weak equity markets. However, Great-West’s per share credit impact was just C11¢ as a result of the lack of charges taken against the bulk of its AIG bond holdings. They are senior bonds, AIG has not actually defaulted, nor have they been downgraded since the U.S. government took control, the analyst explained.

As for equity markets, Great-West reported only a C4¢ negative impact as a result of depressed asset assets and related fee income. But there was no charge for strengthening its guaranteed segregated fund reserves. While the company has zero reserves, it did not need to boost this amount because the present value of its future guarantee costs remains less than the present value of the future fees, Mr. Goldberg said.

“We believe that a key reason why Great-West does not require these reserves is that the guarantees in its seg funds are very limited, and in particular, it does not have a Guaranteed Minimum Withdrawal Benefit product,” he added.

Desjardins moved its rating to “hold” from “buy” and cut its price target on the stock to C$34.25 from C$36.00. Great-West closed at C$25.75 on Thursday.