Last month I wrote about the challenges Canadian banks will face as they try to maintain earnings growth, and it appears the market is finally getting the message now that the banks are reporting their latest quarterly earnings.
Here are five reasons I think Manulife is a better bet right now.
1. Sector rotation
Investors are running out of options when it comes to finding stocks that protect capital and pay growing dividends. The carnage in the energy sector sent a lot of money into the banks in the past few months but disappointing earnings reports and weak guidance for 2015 by the big five could put a halt to the inflows and possible reverse the trend.
Manulife is an obvious choice as an alternative. The company has a strong wealth management operation and a much lower exposure to Canadian residential mortgages than the banks.
2. Funds under management
Manulife continues to grow its assets under management. In the company’s Q3 2014 earnings statement, Manulife reported it now manages a record $663 billion on behalf of its customers, a 15% year-over-year increase.
The recent $4 billion purchase of Standard Life plc’s Canadian assets will add $60 billion to the coffers and give Manulife an instant leadership position in the Quebec market where it has struggled to make headway.
Manulife and Standard Life will also cross-sell products around the globe. This is particulary interesting for Manulife investors because it presents opportunities to penetrate growing markets like India, where Manulife does not currently have a presence.
Manulife’s existing Asian operations continue to grow. In the third quarter, Asian insurance sales rose 46% compared to Q3 2014, hitting a record US$352 million.
3. Solid balance sheet
Manulife has recovered well from the dark days of the Great Recession. The company now boasts a Minimum Continuing Capital and Surplus Requirements Ratio (MCCSR) of 248%, unchanged from a year ago. The minimum required by the Canadian government is 150% for insurers.
The company’s financial leverage ratio continues to improve, dropping to 27.1% in Q3 2014, compared to 32.3% for the same period last year.
4. Dividend growth
After cutting its dividend in half during the financial crisis, Manulife is now retuning more cash to shareholders. The company boosted the dividend by 19% in the second quarter. The current payout of $0.62 per share yields about 2.7%. With the addition of the Standard Life assets and a low payout ratio of just 24%, investors should see another increase in 2015.
5. Cheap valuation
Manulife trades at about 11 times earnings compared to as high as 14.5 times for its peers and 14 for the banks.
The bottom line
The big earnings party at the banks is probably over and that means dividend growth will likely slow in the next few years. At some point, the Canadian housing market will run out of steam. That moment could signal an ugly time for the banks if house prices drop significantly in a short period of time.
Manulife is one place to put money for 2015, but you might want to read the following free report about one other stock that provides solid dividend growth and capital appreciation.
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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.
Fool contributor Andrew Walker has no position in any stocks mentioned.