When it comes to the financials, the biggest question many investors ask themselves is whether it’s better to buy shares of a top bank or an insurance player. In both cases, you’ll score a bountiful dividend, but the value you’ll get for the price you’ll pay is up for debate, especially at this juncture, where Canadian financials have been in a rut.
As the Bank of Canada contemplates rate cuts, bank and insurance investors could undoubtedly be in for a further spill. But despite the bleak outlook, I see potential scenarios within the financial sector that could allow investors to pay a nickel to get a dime.
Many banks and insurance players have already endured a considerable amount of damage in response to the weak macro environment. With nothing but pessimism in the air, contrarians may find today to be an enticing time to step in with a contrarian position.
Let’s have a look at two of the more popular candidates from each financial sub-industry and see which, if either, may be a solid long-term bet for dividend investors.
Royal Bank of Canada
The royal “king of Canadian banking” has been relatively resilient in spite of the recent barrage of industry-wide headwinds. Royal Bank of Canada (TSX:RY)(NYSE:RY) is just 4% away from its all-time high at the time of writing, trumping most other Big Six banks — the worst performing of which is down 17% from its top.
The name provides investors with a well-diversified revenue mix with approximately 66% of revenues coming from home and 34% across the U.S. and Caribbean markets. Although slower capital markets, upped expenses, and higher provisions have been the theme for the banks this year, Royal Bank has rolled with the punches and dodged most of the jabs, hooks, and uppercuts that Mr. Market has thrown its way thus far.
Royal Bank experienced only a modest increase to expenses, up just 8% as of the second quarter, with guidance that points to slowing expense growth for the second half of the year. Although management’s guidance of 7% EPS growth for 2019 may be a high bar to jump for skeptics, including The Big Short‘s Steve Eisman, who’s short the stock, one can’t help but be encouraged by Royal Bank’s recent operating results, which I see as a bright spot that illuminates Royal Bank in its dark industry environment.
Up next, we have Manulife Financial (TSX:MFC)(NYSE:MFC), a Big Three life insurer with a stellar long-term Asian growth plan that just can’t seem to pick up any traction. Many investors are bullish on the name but have struggled to maintain patience because of the roller-coaster ride that never seems to end anywhere sustainably higher.
While the growing Asian middle class will be a boon for Manulife’s wealth management division over the next decade and beyond, net outflows from the global asset management businesses were a major concern as of Q1.
Management blamed the outflows on “portfolio re-balancing” as a result of the rising volatility in the global equity markets. Fair enough, but I’d also note that the improving tech-savvy of the big banks and the rise of up-and-coming digital wealth management service providers may be a long-lasting headwind that could dampen growth.
Despite the near-term pressures, I think Manulife is a solid bet at these depressed valuations for those interested in the incredibly robust 4.3% dividend yield. The stock is ridiculously cheap at 7.9 times forward earnings, one times book, and just 0.9 times sales.
And the better buy is…
Royal Bank and Manulife are both solid bets. But if I had to go with one, I’d have to go with Manulife. Royal Bank isn’t the cheapest bank stock in Canada, nor is it the best. I’d say Manulife gives Canada’s best bank for your buck a good run for its money, especially at under eight times next year’s expected earnings.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.