Worried About Rising Interest Rates? This Stock Benefits From This Environment

Here’s why Manulife (TSX:MFC)(NYSE:MFC) has unique properties as both an undervalued pick and a hedge in this market today.

| More on:
sad concerned deep in thought

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Shares of Canadian life insurance companies such as Manulife Financial (TSX:MFC)(NYSE:MFC) have been soaring over the past year. Indeed, there has been a continuing rally as investors are factoring in rising interest rates.

Wait, what? Aren’t rising interest rates generally bad for stocks?

Well, yes. But not all stocks see declines in a rising rate environment. In fact, life insurers like Manulife can benefit from such an environment. Thus, for investors concerned about rising rates hitting their portfolio, this is a great stock to consider today.

Here’s more on why:

Manulife is set to make the most of the steepening yield curve

A steepening yield curve is a good thing for many financials stocks. Since Manulife’s activities are mostly dependent upon long-term assumptions and obligations in relation to policyholders, rising rates improve the company’s returns over time. Matching long-term liabilities to long-term assets becomes increasingly difficult when yields drop. Fixed income products such as bonds don’t really provide much in the way of return right now. This return affects Manulife shareholders.

However, as bond yields continue to inch higher, investors can essentially double-dip with insurance stocks. On the one hand, investors gain increased exposure to better long-term returns due to a steepening yield curve. And on the other, investors get a nice hedge to growth stocks that could decline substantially in such an environment.

Thus, Manulife looks to be an intriguing contrarian bet at these prices today.

Company CEO Roy Gori agrees. He believes that the rising yields are a big growth catalyst for the stock as far as the long term is concerned.

In Q1 2021, Manulife recorded core earnings per share of $0.82, surpassing analyst expectations of $0.77. Indeed, the company’s operations in Asia have been a key driving factor behind this increase.

Bottom line

Yes, Manulife is trading above pre-pandemic levels at the time of writing. However, I think this stock remains undervalued today. This becomes clearer if one compares its valuation multiple with some of the leading Canadian banks.

Indeed, the shares of this company have consistently been 20% cheaper than the big bank stocks, but I don’t see any valid reason for that. After all, Manulife is a far better option given its geographical diversification and prudent business model.

For investors seeking a solid long-term portfolio position in the financials space, Manulife is a great choice. This company offers a hedge of sorts to rising rates. And it’s cheap. Enough said.

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 Chris MacDonald has no position in any of the stocks mentioned.

More on Dividend Stocks

Happy family father of mother and child daughter launch a kite on nature at sunset
Dividend Stocks

Parents: Here’s Every Credit and Benefit You Can Claim From the CRA

Parents have it hard already, so make sure the CRA is doing everything for you by dishing out payments you're…

Read more »

edit Colleagues chat over ketchup chips
Dividend Stocks

3 Canadian Dividend Stocks to Buy and Hold for Life

These dividend-paying stocks have solid earnings base to support their payouts for decades.

Read more »

A golden egg in a nest
Dividend Stocks

Create a Million-Dollar TFSA With Just $1,000

If you have a TFSA, you can easily make a million-dollar portfolio by investing on a consistent basis in this…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

3 Canadian Stocks With Over 6% of Dividend Yield

Boost your passive income with three safe dividend stocks.

Read more »

TFSA and coins
Dividend Stocks

TFSA Pension: 2 TSX Dividend Stocks to Buy Now and Hold for Decades

These top TSX stocks pay great dividends and look cheap to buy right now for a TFSA retirement fund.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

TFSA Dividend Income: 2 TSX Stocks to Buy on the Pullback

These TSX stocks look oversold and pay attractive dividends that continue to grow.

Read more »

oil tank at night
Dividend Stocks

1 Top TSX Energy Stocks for Summer 2022

TSX energy stocks have tanked recently, but they could enjoy a nice summer rally. Here's one top stock I'm eyeing…

Read more »

TIMER SAYING TIME FOR ACTION
Dividend Stocks

Market Correction: 2 Cheap TSX Dividend Stocks to Buy Now for a Self-Directed RRSP

These top TSX dividend stocks look cheap right now for a self-directed RRSP focused on total returns.

Read more »