Why Standard Life is smart to exit Canada

After 180 years in Canada, British insurance giant Standard Life is selling up and returning a pile of cash to shareholders. The decision has been incredibly well received - Standard shares are within a whisker of last year's record high - and with good reason.

Canadian insurer and wealth manager Manulife is paying a mighty £2.2 billion for the unit which increased first-half operating profit by 37% to £69 million and held total assets under administration of c.$52 billion (c.£31.6 billion) in June. A price/earnings multiple of 19.5 is impressive and represents a price to book value of 1.9 times. It's also £700 million more than Deutsche Bank experts had expected.

Remember, too, that Standard warned just last month that the weak Canadian dollar would likely wipe out £25 million of profit at the Canadian division, now expected to make £155 million in 2014. Growth here is slower than elsewhere, and it's capital intensive.

Lucky shareholders will receive £1.75 billion from the sale, which is expected to complete early next year. That's worth 73p per share and will likely reach them some time during the second quarter of 2015.

And exiting Canada, among a large book of mature products at Standard, should also do wonders for growth. "The sale of its Canadian operations to Manulife removes one of the drags to growth, at an attractive valuation," says Barclays.

"We believe the deal will increase Standard Life's earnings per share growth from 7.35 compound annual growth rate (CAGR) to a 11.6% CAGR through to 2018, a material uplift in growth, and as such, the deal should be taken positively." The guys at Deutsche Bank now pencil in underlying growth of 24% a year for 2013-2016 compared with 15% previously.

What's more, Manulife has also agreed to distribute Standard Life Investments' funds into Canada, the US and Asia. That could more than treble Standard Life Investments' assets under management (AuM) distributed by Manulife - c.$6 billion in the first half of 2014 - within three years, worth an extra £7 billion of AuM. Following the sale, Standard will manage £156 billion of third party AuM globally.

Having shed a slow-growing and capital intensive business, Standard becomes more geared to fee-based income - up from 81% during the first-half to an estimated 94% in 2016.

A quick look at the relative strength index suggests the shares are currently overbought. However, earnings are growing fast, and the company is poised to benefit from recent pension reforms. There's a big dividend yield, too, even after the latest share price rally.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.