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Forget Manulife Financial (TSX:MFC) Stock: Buy This Competitor Instead

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There’s a lot of talk about what great value Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) is at the moment. Here’s why you should ignore the buy signals and talk of undervaluation — and buy its better competition instead.

Manulife Financial is cheap, but not good value

Currently discounted by 37% compared to its future cash flow value, Manulife Financial shares are cheap – so cheap that analysts are falling over each other to give a buy signal.

However, Manulife Financial is not good value based on earnings at the moment. With a P/E of 24 times earnings, that discounted share price looks a little irrelevant. A PEG 2.1 of times growth is not a good sign either. Given that Manulife Financial is looking at a pretty slim 11.6% expected annual growth in earnings over the next one to three years, that PEG should be a lot lower.

And while a P/B of 1.2 times book might look low, it’s actually higher than the Canadian insurance industry average. All told, this stock has bad multiples, and is not a good value buy after all.

It has very low level of unsold physical assets, which is a good sign, though, and debt is well covered. However, given that this is a financial stock, that debt level of 43% seems pretty high.

Finally, we come to the main draw besides that dubious value: dividends. Honestly, a yield of 3.68% seems pretty second-rate in this instance. If this were a better-valued stock with a stronger track record, then that dividend might look pretty good, but having made a negligible return on equity last year, and facing such low growth next year, that payout doesn’t seem worth the risk.

And now for the competition…

Instead of Manulife Financial, Canadian investors looking to hold an insurance stock should go for Great-West Lifeco Inc. (TSX:GWO). It’s discounted by 29% compared to its future cash flow value, so if it’s cheap stocks you’re after and you’ve got the FOMO blues from not buying Manulife Financial, there’s plenty to smile about here.

Great-West Lifeco’s P/E of 13.8 times earnings beats Manulife Financial’s very high ratio, and also beats the TSX average. Its PEG of 1.1 times growth is nice and low: almost half that of Manulife Financial’s price-to-growth ratio. And a P/B of 1.5 times book certainly isn’t bad for a stock of this calibre, either.

Great-West Lifeco’s 12.7% expected annual growth in earnings also beats Manulife Financial’s outlook. Great-West Lifeco’s debt is also nearly half that of Manulife Financial, and its dividend yield of 4.86% is a very good return and much better than Manulife Financial’s so-so offering.

The bottom line

It doesn’t matter if you’ve been investing for five decades or five minutes: the current undervaluation of Manulife Financial is tempting. However, once you dig into the fundamentals and start looking at last year’s earnings decline, Manulife Financial starts to look a little lame.

At first glance it looks like a bargain, but the fact is that the rest of the Canadian insurance industry has been doing pretty well by comparison, suggesting that this stock is probably not a strong buy, despite all the headlines that its undervaluation is generating. In short, forget it and buy Great-West Lifeco instead.

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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 Victoria Hetherington has no position in any of the stocks mentioned.

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