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With Canadian banks starting to raise their dividends, could the life insurance companies be far behind?

Not by much, says Desjardins Securities Inc. analyst Michael Goldberg. He predicts the lifecos will see a recovery similar to that of the banks - just with a one-year lag. That could mean lifeco shareholders may get some extra cash coming their way by early next year - although Mr. Goldberg didn't give any specific forecasts on the insurers' timing.

"The improvement in core earnings and greater stability point to lifecos travelling a recovery path similar to that of the banks over the past year," he said in a report today. "This should mean that their valuation gap should narrow and lifecos' relative performance should improve. While they are not yet there, the next milestone on that path would be capital deployment/resumption of dividend growth."

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The sector will start releasing first-quarter results in early May. Mr. Goldberg believes their "core" earnings will show improvement and reflect greater stability thanks to the economic recovery, stronger U.S. and Canadian stock markets, and higher interest rates.

As such, Mr. Goldberg believes the lifecos remain largely undervalued but this gap should narrow over time. Year-to-date, the lifecos are down 1.3 per cent while the banks are up 8.7 per cent and the TSX is up 3.7 per cent. "Banks are already in capital deployment mode, as evidenced by the resumption of dividend growth by some. We expect the lifecos to recover to this point in the coming year, lagging the banks."

He predicts Industrial Alliance Insurance and Financial Services Inc. will be the first the pull the trigger. "We believe that IAG's strong performance since the start of 2011 reflects its visibility as the first lifeco likely to reach capital deployment mode/resume dividend growth - a factor that has also been a key determinant in the banks' relative performance."

And, he added, "Manulife's low relative valuation may underestimate its potential to be next."

Upside: Mr. Goldberg rates Industrial Alliance Insurance and Manulife both as buys, with price targets of $44.50 and $21, respectively. He has "hold" ratings on Great-West Lifeco ($30 target) and Sun Life Financial Inc. ($36 target).

Desjardins Securities Inc. has bumped up its 2011 average metallurgical coal price forecast by $25 to $235 (U.S.) per tonne after recent contract price settlements came in firm, signalling a tight market. As a result, analyst John Hughes expects Teck Corp. will now post 2011 earnings of $5.05 a share, up 30 cents from earlier expectations, although he remains cautious on the first quarter due to weather-related issues.

Upside: Mr. Hughes reiterated his "buy" recommendation and $76 price target.

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Desjardins Securities Inc. analyst Benoit Poirier sees "large potential return and limited downside risk" in shares of Canadian Helicopters Group Inc. . Management is confident the company will close its acquisition of Helicopters (N.Z.) Ltd. of New Zealnd in the third quarter as planned, which Mr. Poirier sees as a "major catalyst" for a stock rally.

Upside: Desjardins upgraded the stock to a "top pick" and raised its target price by $10 to $32.

Although Stella-Jones Inc.'s should deliver solid 2011 results, its growth rates should ease in the near term with margin expansion "to be a slow and steady contributor to earnings," said Desjardins Securities Inc. analyst Pierre Lacroix. "Following the stock's surge of 60 per cent in the past six months, we would advise investors to wait for weaknesses before building a position in the name," he said.

Downside: Mr. Lacroix downgraded the stock to "hold" from "buy" and maintained his $44 target.

Armtec Infrastructure Inc. ARF-T has completed a bought deal financing by issuing 3.7 million common shares at $16.20 a share, for total proceeds of $57.8-million. While Canaccord Genuity analyst Yuri Lynk notes the equity issue will be dilutive, he believes the company's 10 per cent dividend yield is sustainable and sees a "rebound in earnings power."

Downside: Mr. Lynk cut his price target by 50 cents to $18 and reiterated his "buy" rating.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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