Empower's Expansion Will Attract New Customers And Strengthen Core Segments

Key Takeaways

• Strong U.S. growth, particularly in the Empower segment, is driven by wealth and retirement focus, enhancing future revenue and earnings.
  
• Strategic acquisitions and disciplined capital deployment support long-term growth and strengthen core segments, benefiting net margins and earnings.
  
• Great-West Lifeco's growth faces risks from trade uncertainty, market conditions, currency fluctuations, retirement fund outflows, real estate credit risks, and reinsurance losses.

Catalysts

Engages in the life and health insurance, retirement savings, wealth and asset management, and reinsurance businesses in Canada, the United States, and Europe.

• Great-West Lifeco's strong growth in the U.S., especially with the Empower segment, is expected to continue, driven by a focus on wealth and retirement. This should impact future revenue and earnings positively as Empower contributes to double-digit base earnings growth.
  
• The recent acquisition of Plan Management Corporation enhances Empower's service offerings, making it more appealing to existing and future customers and potentially increasing revenue and earnings over time.
  
• The company's strategy of disciplined capital deployment, including new strategic agreements and asset sales like Putnam, supports long-term growth by strengthening core segments, which should benefit net margins and overall earnings.
  
• Introduction of new financial products and services across different regions, such as the expansion of insurance and retirement offerings in Europe, is expected to drive positive net flows and revenue growth, contributing to improved earnings.
  
• The decision to increase the dividend by 10% and a planned share repurchase program underlines strong capital generation, which should improve shareholder value through earnings per share growth.

Great-West Lifeco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Great-West Lifeco's revenue will grow by 27.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.5% today to 6.0% in 3 years time.
• Analysts expect earnings to reach CA$4.4 billion (and earnings per share of CA$5.02) by about April 2028, up from CA$4.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, up from 12.3x today. This future PE is greater than the current PE for the CA Insurance industry at 12.5x.
• Analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.82%, as per the Simply Wall St company report.

Great-West Lifeco Future Earnings Per Share Growth

Risks

• The tariff-related uncertainties between Canada, the U.S., and other markets pose a risk that could impact Great-West Lifeco's revenue and net margins due to potential shifts in trade policies affecting economic conditions.
  
• While Empower Personal Wealth continues to deliver strong growth, consistent net outflows from the workplace retirement plans, driven by members withdrawing funds for retirement, could pose challenges to maintaining growth in fee income and overall earnings.
  
• A significant portion of Great-West Lifeco's growth in earnings and returns has benefited from favorable equity markets and foreign currency movements. A downturn in market conditions or adverse currency fluctuations could negatively impact asset growth, fee income, and earnings.
  
• Although Empower has seen reductions in credit impairments and commercial mortgage losses, ongoing risks in commercial real estate could lead to future credit losses, affecting net earnings in volatile economic conditions.
  
• The P&C reinsurance business, while reduced in exposure, still carries the risk of significant losses from catastrophic events, which could impact profitability and earnings in the Insurance and Annuities segment.

Valuation

• The analysts have a consensus price target of CA$55.05 for Great-West Lifeco based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$62.0, and the most bearish reporting a price target of just CA$44.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$72.8 billion, earnings will come to CA$4.4 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 5.8%.
• Given the current share price of CA$53.0, the analyst price target of CA$55.05 is 3.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.