Canadians were met with more bad news this week as the Bank of Canada stated it would be holding the key interest rate at 5%. Not that it was expected to drop, but Canadians can hope, can’t they?
Yet, if you’re an investor in an insurance company such as Manulife (TSX:MFC) stock, this is great news! Let’s look at the link between higher interest rates and insurance companies to see why Manulife stock continues to be a solid option during this time.
The link
When interest rates are higher, there are certain types of companies, such as insurance companies, that perform better than others. Insurance companies may benefit from these higher interest rates because they invest a lot of cash in their portfolios into fixed-income securities.
Therefore, when interest rates rise, the yields on these investments increase. This can lead to higher investment income for these insurers, leading to higher profitability and financial performance.
There are other factors as well that benefit this link. While interest rates can increase investment income for insurers, they also allow insurers to increase pricing and underwriting practices. Insurers may adjust premium rates and underwriting standards in response to higher rates. This will allow them to remain profitable as well as manage risk.
The case of Manulife stock
Manulife provides insurance as well as wealth and asset management solutions. Therefore, Manulife stock would certainly invest premiums received from policyholders in various fixed-income securities. So, the company has seen higher yields from investments.
The company has also seen an improved net interest margin — the difference between interest income earned on investments and the interest expenses paid on its liabilities. So, the company has certainly also seen higher returns on its investment portfolio while maintaining relatively stable interest costs and increasing its prices.
Higher interest rates can lead companies to increase their costs, and Manulife stock has been one of them. As insurance and wealth management tends to remain stable no matter the market, this has allowed the company to actually increase sales and revenue.
Buy for safety. Stay for the dividend
Manulife stock has, therefore, been a strong company that continues to beat out earnings estimates quarter after quarter. Shares are currently up 32% in the last year alone as of writing, all while continuing to trade at just 12.82 times earnings.
Meanwhile, you can get in on a stable dividend yield currently at 4.78% as of writing. That’s supported by a stable payout ratio of 56%. Debt has also remained quite manageable, with just 46% of equity needed to cover all debts.
All in all, Manulife stock remains a stable company that has increased revenue during this difficult time. So, while other stocks are struggling, Manulife stock will continue to invest in these fixed-income securities to increase profitability, all while increasing prices and bringing in more sales. So, that dividend, as well as future returns, looks incredibly safe.
