2 TSX Insurance Stocks to Buy as Interest Rates Rise

A rising interest rate environment could be an excellent time to buy-and-hold insurance company stocks.

| More on:
Mature financial advisor showing report to young couple for their investment

Image source: Getty Images

The Bank of Canada (BoC) raised interest rates to 0.50% following the results of their March 2nd policy deliberations. A combination of high inflation (5.1%) and GDP growth (6.75%) meant that the BoC had to pull the trigger on a 0.25% increase.

What does this mean for your portfolio? Well for one, bond yields will be increasing. This causes the price of bonds to decrease, as price and yield have an inverse relationship. When it comes to stocks, overvalued pandemic-era growth and tech sector stocks will likely face strong headwinds moving forwards.

Why we want insurance stocks

However, not all market sectors are affected badly by rising interest rates. Certain ones, like the insurance industry, have historically shown improved profitability in a rising interest rate environment. In fact, the greater the rate hikes, the greater the growth, with increases in price-to-earnings ratios and margins.

Combined with a healthy divided yield and history of consistent payout increases, Canada’s insurance stocks could be an excellent defensive play when the rest of the market and U.S. indexes are trading more or less sideways. Buying now could be a great way to lock in a low yield on cost, as the valuation of many of these stocks is quite attractive.

The best candidates for the role

My top two TSX insurance stock picks would be Manulife Financial Corp (TSX:MFC)(NYSE:MFC) and Sun Life Financial Inc (TSX:SLF)(NYSE:SLF).

Both companies provide insurance, wealth, and asset management solutions to individuals and corporate clients worldwide. They offer products like term and permanent life, as well as personal health, dental, critical illness, long-term care, and disability insurance products.

MFC and SLF also provide reinsurance products; investment counselling and portfolio management services; mutual funds and segregated funds; trust and banking services; real estate property brokerage and appraisal services; and merchant banking services to the aforementioned clients.

I’ve provided a head-to-head breakdown on some of their key metrics below:

  1. Market cap: MFC has a market cap of $50 billion, while SFC has a market cap of $38 billion
  2. Beta: MFC has a beta of 1.20, while SFC has a beta of 0.98
  3. Dividend: MFC has a yield of 4.36% and payout ratio of 33%, while SFC has a yield of 3.50%, and a payout ratio of 34%
  4. Profitability: MFC has a profit margin of 11.12%, while SFC has a profit margin of 11.31%
  5. Valuation: MFC has a forward P/E of 7.32 and P/B of 0.99, while SFC has a forward P/E of 10.37, and a P/B of 1.64

The Foolish takeaway

A word of caution: the backtest results provide below are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Hypothetical returns do not reflect trading costs, transaction fees, or actual taxes due on investment returns.

That being said, from 2001 to present with dividends reinvested, both SLF and MFC underperformed the S&P/TSX 60, with lower returns, higher volatility, and worse drawdowns.

If you’re a younger investors, I would advise holding the index, ideally through an exchange-traded fund (ETF). If you’re seeking income versus capital appreciation, or implementing a dividend growth strategy, MFC and SLF might be a better bet.

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 Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

edit Sale sign, value, discount
Dividend Stocks

3 Cheap Dividend Stocks (Down Over 30%) to Buy in January 2023

Given their discounted stock prices and high yields, these three cheap dividend stocks could be attractive for income-seeking investors.

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

TFSA Investors: Earn Passive Income With 3 Blue-Chip Stocks

TFSA investors can worry less about a recession and earn passive income with three blue-chip stocks as core holdings.

Read more »

Hourglass projecting a dollar sign as shadow
Dividend Stocks

Is Now the Right Time to Buy Consumer Discretionary Stocks?

Investors cannot paint consumer discretionary stocks with a wide brush. Each stock must be investigated individually. Here's why.

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Ultra-Stable Canadian Stocks Just Crowned as Dividend Aristocrats for 2023

Waste Connections (TSX:WCN) stock and another Dividend Aristocrat could help investors crush the markets in 2023.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Create $200 in Passive Income Every Quarter From 1 Defensive Stock

Risk-averse investors can seek safety in a defensive stock and earn more in passive income in 2023 and beyond.

Read more »

railroad
Dividend Stocks

Slow and Steady: Buy this Railroad Stock Now to Win the Race

Investors looking for a solid and growing income should pick up shares in this railroad.

Read more »

retirees and finances
Dividend Stocks

RRSP Investors: Should You be Worried During a Recession?

RRSP savers might feel like gagging as they watch their investments fall, but stay strong! Especially with these TSX stocks.

Read more »

Payday ringed on a calendar
Dividend Stocks

Money for Nothing: 2 High-Yield TSX Stocks That Pay You Dividends Every Month

Two resilient, high-yield TSX stocks in the quick-service restaurant industry are among the select few that pay monthly dividends.

Read more »