Interest rates are rising, growth in Asia is gaining momentum, dividend yields are strong, and dividends are rising, providing both of these income stocks with strong tailwinds heading into the second half of the year.
While both Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) and Sun Life Financial Inc. (TSX:SLF)(NYSE:SLF) stocks will benefit in this environment, let’s take a closer look to determine which one is the better buy.
Manulife is trading at lower multiples than the life insurance group, despite strong momentum in Asia and in wealth management, and despite strong efficiency improvements.
Core earnings is Asia increased a solid 19% in the first quarter of 2018, as the insurer continues to be successful in ramping up the business in an area with a rapidly growing middle class.
The company’s global wealth and asset management segment saw a 24% increase in core earnings and strong gross flow from all regions, with Asia up 35%, Canada up 33%, and the U.S. up 5%.
On the cost side, Manulife has embarked on making improvements to its operational efficiency. To this end, Manulife has achieved $500 million of pre-tax annualized cost savings in 2016, and we should expect more to come, as this remains a focus for the company.
Manulife stock is currently trading at a dividend yield of 3.68%. And not only that, but the dividend has been growing. The dividend was increased four times in the last five years, with the latest one being a 7% increase in the fourth quarter of 2017.
As far as earnings sensitivity to interest rate movements, it’s big — another positive for the stock.
A 50-basis-point increase in interest rates would have a $100 million impact (increase) on net income and have a meaningful effect on its minimum continuing capital and surplus requirement ratio.
Similarly, Sun Life is reporting strong results out of Asia, but not unlike Manulife, its wealth management business has been suffering from consistent fund outflows. And while the hope is that these outflows can be curtailed, the stock is trading at significantly higher valuations, so it’s especially vulnerable should this trend continue.
The company has been buying back shares and has announced regular dividend payment increases, signifying management’s confidence in the business, which is always a good sign. The dividend yield is currently 3.47%.
Sun Life’s interest rate sensitivity is not as significant as Manulife’s. A 50-basis-point increase in interest rates would increase net earnings by $50 million.
Considering all of this, my conclusion is that Manulife is a better buy at this time.