Canada’s Life Co’s are the Best Way to Play Rising Rates

It’s time for these companies to shine!

| More on:
The Motley Fool

Bond yields have been stirring of late as the yield on the 10-year U.S. Treasury has lifted from 1.70% at the end of April to its current mark in the 2.20% range.

There is a collection of stocks on the Canadian market that is poised to do very well should this move continue.  And, even if rates don’t move higher today or tomorrow, over the medium- to long-term there is really only one direction that they can go.

The Canadian life co’s, which include the likes of Manulife (TSX:MFC), Sunlife (TSX:SLF) and Great-West Life (TSX:GWO), and even Great-West’s parents, Power Corp. (TSX:POW) and Power Financial (TSX:PWF), stand to benefit from this inevitable rise.  Here’s why…..

Profits up, book value up, stock price up

The reason is two-pronged.  Life insurance companies are huge owners of fixed income securities, which they use to match their long-life liability profiles.  Their profitability has been hindered in recent years as bonds that had been yielding, say, 5% matured and the proceeds had to be re-invested into bonds that yielded, say, 3%.  Should rates rise, the proceeds from these 3% bonds will be reinvested at a more attractive rate as they mature.  This is good for interest income and good for the bottom line.

The other prong is more complicated.    

For accounting purposes, life co’s must calculate the present value of their long-life liabilities on a quarterly basis to carry them on their balance sheet.  To calculate this present value, a discount rate that is tied to current bond yields is utilized.  When bond yields are low, the discount rate is low, and therefore the denominator in the present value calculation is low.  This causes liabilities to be high, and impacts the equity value of these companies (Assets – Liabilities = Equity).  As bond yields rise, liabilities will shrink and book value (shareholder’s equity) will benefit. 

The Foolish Bottom Line

Combine the increased profits associated with rising yields and a shrinking liability profile, along with all the other good things that these companies have going for them (ageing demographic, int’l expansion) and you’ve got yourself a nice little recipe for a solid long-term return.  Plus, all 3 pay a nice dividend to boot! 

The Canadian life co’s are 3 of this country’s finest businesses.  The Motley Fool’s Special Free Report3 U.S. Companies That Every Canadian Should Own” profiles 3 of the best that our neighbour to the south has to offer.  To download this report at no charge, simply click here.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler owns shares of Sunlife Financial.  The Motley Fool has no position in any stocks mentioned at this time

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

think thought consider

TSX Stocks Are Still Dirt Cheap! 3 Bargains I’d Buy Today

TSX stocks like Well Health and BlackBerry are digitizing their chosen industries and effectively disrupting the landscape.

Read more »

investment research
Dividend Stocks

Better Buy: Scotiabank or TD Bank Stock?

Take a closer look at Scotiabank and TD Bank stock to determine which might be the better addition to your…

Read more »

retirees and finances
Dividend Stocks

How to Retire in a Bearish Market

Are you looking to retire this year but are skeptical because of the bearish market? Here is a way to…

Read more »

Hand writing Time for Action concept with red marker on transparent wipe board.

2 Seriously Misunderstood Value Stocks to Snap Up Before the Market Figures Them Out

Jamieson Wellness (TSX:JWEL) and another mid-cap stock are worth consideration for your TFSA.

Read more »

Target. Stand out from the crowd
Dividend Stocks

TFSA Investors: 2 Stocks to Buy if the Market Drops Even More

We still aren't in a recession, so we still haven't seen a market bottom. If these stocks drop even more,…

Read more »

analyze data

Why Brookfield Asset Management Could Be One of the TSX’s Best Value Stocks

Brookfield Asset Management (TSX:BAM) is a wonderful dividend-growth stock that's hiding in plain sight right now.

Read more »

Woman has an idea
Dividend Stocks

2 Dirt-Cheap Dividend Shares I’d Buy for Long-Term Passive Income

Dirt-cheap dividend stocks should be evaluated more thoroughly than their more stable counterparts for long-term dividend sustainability.

Read more »

stock research, analyze data
Dividend Stocks

3 Oversold Dividend Stocks (With a 7% Yield) I’d Buy Right Now

TSX dividend stocks such as Enbridge and TC Energy offer investors dividend yields of more than 7% in 2023.

Read more »