Rising Interest Rates Will Likely Take Manulife Financial Corp. (TSX:MFC) Higher

Manulife Financial Corp. (TSX:MFC) (NYSE:MFC), the most attractively valued life insurance stock, can be expected to rise right along with interest rates.

| More on:
edit Businessman using calculator next to laptop

Image source: Getty Images.

At its latest meeting on October 24, 2018, the Bank of Canada opted to raise the benchmark interest rate to 1.75%, in a move that was widely expected.

This level represents a 125 basis point increase from 2017 levels, which is a big move.

Going forward, we can still expect more interest rate increases, as the economy is strong and inflation is pushing onto the Bank’s target level.

Amid an environment of rising rates, it’s easy to get nervous about the market in general, about certain sectors such as those whose companies hold a lot of debt, as well as those who are reliant on strong consumer spending, and about valuations.

But in this context, we should remember that there is at least one sector that stands to benefit.

That is the financial sector.

Here I will talk about life insurance companies, who stand to benefit greatly from rising interest rates.

Rising interest rates mean that cash flows will be invested at higher yields, and so the re-investment risk on the assets is positive, driving higher earnings and cash flows.

Manulife Financial Corporation (TSX:MFC)(NYSE:MFC)

The most undervalued of the group, Manulife stock price has languished in the last year, as sentiment went from bad to worse.

But looking at fundamentals, we can see encouraging results.

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.

At 4.21%, Manulife stock’s dividend yield is very attractive.

From a macro perspective, interest rates are rising, and from a company-specific perspective, Manulife is seeing strong growth in wealth and asset management, and in its expansion in Asia.

In the second quarter of 2018, Manulife posted an 18% increase in core earnings, earnings per share of $0.64, and an ROE of 14.1%, which was above its targeted range and a solid improvement from prior levels.

Although also down in the last year, Sun Life Financial Inc. (TSX:SLS)(NYSE:SLF) stock has been the most consistent and strongest, with a current dividend yield of 3.93%.

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.

The company is reporting strong results out of Asia, but its wealth management business has been suffering from consistent fund outflows.

Great-West Lifeco. Inc. (TSX:GWO) has a dividend yield of 4.63%, which is higher than its peers, but this reflects a riskier proposition.

The company has been plagued by net outflows in its Putnam segment, with both the mutual fund and institutional business reporting outflows, with aggregate net outflows of US$1.2 billion.

So while Great-West increased its dividend earlier this year to the tune of 6% and the company is implementing cost reductions, it seems that the deteriorating situation at Putnam and the stock’s rich valuation relative to its peer group will put a damper on the stock price going forward.

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 Karen Thomas has no position in any of the stocks mentioned.

More on Dividend Stocks

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Top 2 REITs to Buy Before Yields Fall Along With Interest Rates

Canadian Apartment Properties REIT (TSX:CAR.UN) is just one REIT that could gain when rates really start to tumble.

Read more »

Printing canadian dollar bills on a print machine
Dividend Stocks

Where to Invest $10,000 in June

Canadian small caps are widely outperforming the TSX, and REITs, including Dream Industrial REIT (TSX:DIR.UN) could recover as interest rates…

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

Finally, This REIT ETF Could Be the Best Buy of 2024

This ETF is finally looking up, with enormous returns already in 2024. And a high dividend yield that should only…

Read more »

dividends grow over time
Dividend Stocks

3 Canadian Stocks Poised to Double by 2025

Three TSX stocks could benefit from an improved market environment, and break out and double by 2025.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Why Park Lawn Stock Nearly Doubled Last Week

Park Lawn (TSX:PLC) stock saw shares surge by 67% after the announcement that it would be going private as early…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

Claim CPP at 60? Here’s Why it Could Pay Off Big

Claiming the CPP at 60 has financial consequences but could be advantageous and more beneficial to some prospective retirees.

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

Rate Cut Tailwinds: A Dividend Dynamo Ready to Fly

SmartCentres REIT (TSX:SRU.UN) is a great high-yield play to own if you think rates will fall off from here.

Read more »

Increasing yield
Dividend Stocks

2 High-Yield Dividend Stocks That Are 10/10 Buys in June

These two dividend stocks are making a roaring comeback, and it's one that will only grow stronger now that interest…

Read more »