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Is Sun Life Financial Inc. (TSX:SLF) Stock About to Heat Up as Interest Rates Rise?

As we move deeper into a rising interest rate environment, naturally, it makes sense for long-term investors to pay close attention to the Big Three Canadian lifecos, which will treat the effect of rising rates as a tailwind.

Sun Life Financial Inc. (TSX:SLF)(NYSE:SLF) has arguably been the best-in-breed Canadian life insurance stock over the past few years, beating the likes of Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) and Great-West Lifeco Inc. by a country mile.

With an attractive 3.6% dividend yield and a stronger technical chart than that of its peers, there’s no question that today may seem like a compelling time to “brighten up” your portfolio with Sun Life stock, especially if you’re exposed to other high-income plays that will be negatively impacted by higher interest rates (think REITs, telecoms, and utilities).

Pretty hot Q1 2018 results

Sun Life saw its EPS increase 35% to $1.26, beating the Street consensus of $1.12. The annualized ROE of 15.1% was worthy of a round of applause in itself thanks to greater cost controls and subtle improvements on the margin front.

Compared to Manulife, which has suffered from meagre single-digit ROE numbers over the past few years thanks to its lagging John Hancock business, Sun Life looks like the best bang for your buck if you’re keen on jumping into the lifeco space.

Management hiked its dividend by 4% in Q1 to $0.475 per quarter. Moving forward, it looks like Sun Life can continue growing its dividend at a five-year historical average dividend CAGR around 6%, as it continues to benefit from rising interest rates and improving ROEs across its geographic segments.

Is the stock a buy right now?

Although Sun Life crushes Manulife on the ROE front, it’s worth noting that Sun Life is more exposed to both mortgage and lower-credit corporate loans than Manulife or Great-West. That means the company could find itself in hot water if cracks were to develop in the frothy housing market.

At the time of writing, Sun Life stock trades at a 14.4 trailing P/E, a 1.4 P/B, a 1.2, P/S, and a 10.8 P/CF, all of which are relatively in line with the company’s five-year historical average multiples of 13.1, 1.5, 1.2, and 9.5.

Based on traditional valuation metrics, shares look fairly valued. With a shortage of meaningful near-term catalysts, I think shares could consolidate over the next few months. I would recommend investors look elsewhere, unless they’re content with collecting the juicy 3.6% dividend yield.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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