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.
