The financial sector is starting to find its footing again after a choppy past few months. Indeed, the Silicon Valley Bank failure caused a lot of panic to spread through the banking scene. Though only certain U.S. regionals were at risk of runs and failing, it was hard to stop the pain from spreading to the bigger U.S. banks, and, eventually, banks outside of the U.S.
When it comes to banking, it’s easy to get in a bit of a panic. Bank runs can happen at the drop of the hat, especially in the digital age where deposits can be moved at the click of a few buttons. Though the banking scene has always been subject to volatility when a crisis hits, I think the situation was overdone. Further, I’m impressed with the quick reaction by regulators south of the border. Sometimes swift action can stop a panic from turning into a horrific contagion.
As banks settle down and the financial sector begins to participate in the broader market rally, I think new Canadian investors may wish to give the many discounted names another look. In this piece, we’ll look at two intriguing financial stocks (one bank and one insurer) that may make for a great value bet for investors willing to hold for the next five years.
Without further ado, consider shares of Manulife Financial (TSX:MFC) and Royal Bank of Canada (TSX:RY).
Manulife Financial is a Canadian life insurance play that’s really struggled to deliver for investors over the last several years. Apart from the 2020 stock market crash, which sent MFC stock below $15 per share, MFC stock has been most range-bound between $20-25 per share.
It’s really struggled to break out, thanks to challenging industry conditions. With a Canadian recession up ahead and a slumping Asian economy, MFC stock could continue to lag for some time. Still, the longer-term growth trajectory could spark a breakout at any time over the next few years, likely once the recession ends.
Manulife’s Asian business could help it grow considerably through the next decade. And though it’s tough to tell when the economic tides will turn. I think long-term investors need to stay patient with the name. There’s a great incentive to do so! The stock sports a 5.62% dividend yield, which can help many investors cope with 4-4.5% inflation for the time being.
Royal Bank of Canada
Up next, we have Canada’s top bank, Royal Bank of Canada (or RBC), which hasn’t taken as big a hit to the chin as its banking peers. At writing, RY stock is off just north of 12% from its all-time high. That’s not bad considering the U.S. regional banking shock sent some Canadian banks into a bear market. Relatively speaking, RBC has been resilient, with a strong domestic business that’s secure from troubles that brewed south of the border.
Despite the resilient performance, analyst John Aiken of Barclays isn’t too bullish on RBC. He cut RY stock to underweight, primarily due to valuation. I think Mr. Aiken is right to be concerned. RY stock is not cheap relative to its peers at 12.5 times trailing price to earnings. The 4% dividend yield also isn’t as large as some of its smaller brothers.
Is the premium price tag worth paying up for?
I think it is. When recessionary times strike, you want the best-in-breed banks that’ll allow you to sleep at night. RBC commands a premium over the peer group for a reason. Though I think any Canadian bank will do well longer term, I view RY stock as a king among men in the financial space. As such, I’d not be too concerned about the valuation — though the lower multiples of its peers is tempting!