After a short-lived boost, it seems that interest rates are back in the bad books once again. That means it is time to take a look at companies that might be negatively affected by a retreat in interest rates to see if you should go elsewhere. I’m not talking about interest rate-sensitive stocks. In this article, I’m going to take a look at two major insurance providers, Manulife Financial (TSX: MFC)(NYSE: MFC) and Sun Life Financial (TSX: SLF)(NYSE: SLF).
I was buying the insurance companies like Manulife and Sun Life with the expectation that interest rates would cause these stocks to skyrocket when they eventually were raised. While there were some respectable capital gains, the thesis of huge upside for insurance rate providers never came to pass.
In fact, these companies’ stock prices have simply languished for years as rates have lingered on and on. Insurance companies are supposed to make money by taking premiums from insurance policies and investing them largely in stable long-term bonds. Unfortunately, low rates have cut into these companies’ returns over the years, reducing their ability to earn high rates of return on these premiums. Investors have lost faith in these companies and have left their share prices to languish.
But both Manulife and Sun Life have actually still been making pretty good money over the last few years. Manulife increased its core earnings by 23% and net income by 77% at year-end 2018 over 2017. Sun Life increased its net income by a healthy 17% as well and basic earnings per share by 18%. These increases were driven by their geographically diverse operations, with both companies having divisions in the United States and Asia.
Both companies are income generators as well, having solid dividends that are growing over time. Sun Life was able to increase its dividend by 9% in 2018 and Manulife boosted its payout by 14%. At one time last fall, Manulife had a dividend of over 5%. At the moment, due to increases in share prices as the stocks have risen with the general market, Manulife has a dividend of just over 4% and Sun Life’s yield has fallen below 4% to around 3.8%.
The bottom line
The fact that interest rates are now on pause has not seemed to have affected the share price negatively at the moment. This might be a result of the fact that both companies’ share prices have continued to languish for the past few years in spite of the interest rate increases that were supposed to have helped their share prices.
But their internationally diversified businesses, healthy dividends, and growing businesses might make these appealing investments to long-term income investors. Personally, I have given up on the group somewhat after the failure of interest rate increases to boost their share prices.
But even though these stocks may not be set to rocket higher, maybe it is time to take a second look at these companies. If the share prices fall to the point where the dividend is over 5%, I think it might be time to step back into these Canadian insurers.
