Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) had a fantastic third quarter that crushed analyst expectations thanks to huge growth in Asia. The stock responded by soaring 9.2% in a single trading session. I believe this is the start of what could be a rally back to new highs.
The stock has been an undervalued and underperforming pick for quite some time, but this may change as Asian growth finally starts to kick in. The tailwind of higher interest rates can also be expected over the next few years.
These are the types of stocks that billionaire investor Warren Buffett loves: stocks that have gone out of favour and have considerable margin of safety, meaning the share price is much lower than the intrinsic value of the company.
Donald Trump’s policies could help give life insurance companies a boost
Donald Trump promised to lower corporate taxes and said he would strengthen the U.S. economy, which would imply higher interest rates going forward.
Insurance companies like Manulife, Sun Life Financial Corp., and Great-West Lifeco will benefit greatly from this upward trend in interest rates as the long drought of low interest rates may soon come to an end.
Breaking down the great quarter
Manulife’s Asian business increased a very impressive 16.6% in Q3 when compared with the same period last year. The U.S. business saw a $297 million increase compared to $220 million a year earlier.
The company also crushed analyst expectations of $0.44 earnings per share by delivering $0.49 earnings per share.
This truly is a fantastic quarter, and I believe it will be the start of a much-needed sustained rally to higher levels, as the stock has been too cheap for too long, and now the market is starting to realize it’s true value.
Should you pick up shares? What about value?
The stock enjoyed an impressive single-day rally, but I think there’s more upside from here in the short and long term.
The stock is currently undervalued based on almost every traditional valuation metric there is. Price-to-book, price-to-sales, price-to-cash flow are all cheaper than their five-year historical average values.
The dividend yield is a fantastic 3.4%; it will grow over the next few years as interest rates slowly increase back to higher levels.
Although the dividend was cut during the financial crisis and the business struggled to rally back, I believe the days of dividend cuts are over. The risk-management team has improved, and we may see the stock finally get back on the road to recovery once interest rates and Asian growth start picking up.
If you’re a contrarian investor with a long-term horizon, then now may be the time to pick up shares of Manulife.
Going into 2017, I see the stock being one of the biggest winners since it’s flown under the radar for the last few years. If you buy the stock, you can hold it and collect the bountiful dividend, while you wait for higher interest rates to kick in, which will give the stock a much-needed boost.
