Growing global macroeconomic uncertainty and declining economic growth across the eurozone and China are generating fears of a sustained market correction, with billions already wiped off global stock markets.
But the headline hype is far more exciting than the truth.
Investors focused on investing in quality companies with stable earnings, a solid competitive advantage, and stable dividend payments for the long term will continue to be rewarded. Let’s take a closer look at two Canadian financial stocks, which not only fit this description but after the recent pullback in their share prices are bargains waiting to be snapped up by patient investors.
Manulife Financial Corp.
Canada’s largest life insurer and the world’s 30th-largest money manager has seen its share price pull back 6% over the last month. I believe this pullback makes now the time for investors to take a closer look at Manulife and add the company to their portfolio.
The company possesses many of the characteristics of a solid long-term dividend growth stock, which, when coupled with management’s conservative yet confident approach, can only see it deliver long-term value. Already, we are seeing signs of the company asserting itself. There is the recent acquisition of Standard Life Canada coupled with Manulife hiking its dividend by 19% at the end of the second quarter of 2014, its first since the global financial crisis.
This dividend hike now sees Manulife paying a solid yield of 2.9% coupled with a very modest and sustainable payout ratio of 29%, indicating there is considerable room for further dividend hikes.
Manulife also has a solid economic moat, with the life insurance and funds management industries having significant barriers to entry. These include considerable regulatory and capital requirements. This protects Manulife’s competitive advantage, which with the acquisition of Standard Life has been further strengthened and will certainly boost earnings growth over the long term.
Toronto-Dominion Bank
One strategy for sidestepping the global slowdown is to increase exposure to the U.S., which is the only major economy with a strong growth trend. This can be seen with the U.S. dollar continuing to strengthen in recent days against other major currencies, with many analysts expecting this trend to continue.
What better way to do this than by investing in Canada’s largest bank by assets, Toronto-Dominion Bank (TSX: TD) (NYSE: TD), which has built an impressive commercial banking and wealth management franchise in the U.S. These operations already contribute over a quarter of its net earnings and are experiencing healthy loan growth. This now sees a quarter of the bank’s total loans under management coming from its U.S. operations.
I expect this trend to continue despite recent market jitters, with the U.S. economy continuing to grow strongly. Recent forecasts put U.S. GDP growth for 2014 at 2.2% and 3% for 2015.
Like each of Canada’s major banks, Toronto-Dominion possesses a wide economic moat because of its dominant domestic market share and the steep barriers to entry associated with the banking industry. This allows it to effectively protect its competitive advantage and preserve earnings growth even in times of economic uncertainty.
Even more compelling for investors is Toronto-Dominion’s steadily growing dividend, which it has been paying for 44 years and it has hiked for the last four consecutive years. This gives it a juicy yield of 3.5% and a very sustainable payout ratio of 47%. Such a low payout ratio leaves plenty of room for further dividend hikes as industry fundamentals improve and earnings grow.
Both companies are well positioned to weather the current volatile global economic environment while protecting their competitive advantage and rewarding investors with a generous and sustainable dividend payment. This, I believe, makes them core holdings for any income-focused stock portfolio.
