Sun Life's U.S. Credit Issues May Hurt Its Rivals

Sun Life Financial Inc.’s (SLF) disappointing second quarter results produced a 6% sell-off in its shares on Thursday, and its gloomy U.S. macroeconomic outlook and decision to keep its dividend at C$9.36 per share didn’t help much either. This ends a five-year streak of semi-annual payout hikes.

Analysts responded to the news by cutting their price targets and earnings forecasts on the insurer. Andre-Philippe Hardy moved to C$47 per share from C$50, along with reductions to his 2008 and 2009 earnings forecasts, noting that credit-related items and the impact of prior declines in equity markets will likely drag on future earnings.

He told clients:

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.

However, Mr. Hardy also noted Sun Life’s high level of capital and exposure to a large asset management business as some of the positives.

Desjardins Securities analyst Michael Goldberg cut his target to C$50 from C$53.50 and noted that investors will be looking for similar negative credit factors in Manulife Financial Corp.’s (MLC) results. However, he does not expect any material credit issues will show up in Manulife’s U.S. results, just as there were none apparent in Great-West Lifeco Inc.’s (GWLOF.PK).

In a research note, Mr. Goldberg said:

A situation where Sun Life is seen to be the only one of the major Canadian-based lifecos hurt by U.S. credit issues will probably continue to hurt the relative performance of Sun Life’s shares going forward, at least in the near term.

He also cut his 2008 and 2009 earnings per share estimates, saying the reduction this year is due to macroeconomic factors that produce lower assets under management and fees.