Manulife (TSX:MFC) and CIBC (TSX:CM) are up 65% and 60%, respectively, in the past 12 months. Investors who missed the rally are wondering if MFC stock or CM stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio targeting dividends and total returns.
Manulife
Manulife trades near $40 at the time of writing compared to $25 around this time last year. The stellar performance has occurred as efforts over the past years to de-risk the business and implement digital solutions have started to pay off.
Manulife has also benefitted from the surge in interest rates that occurred in 2022 and 2023. Insurance companies need to keep significant cash available to cover potential claims. The sharp rise in interest rates helped boost returns that could be earned on the funds.
Manulife is also seeing solid growth in its Asia business, where the company has a significant presence.
Core earnings for the first half of 2024 came in at $3.49 billion compared to $3.17 billion in 2023. Asia core earnings rose 40%, with Canada seeing a 5% gain and the U.S. business generating a 2% increase. The Global Wealth Management business, anchored by the John Hancock operations in the United States, saw core earnings jump 24%.
At the time of writing, Manulife’s dividend provides a yield of 4%.
CIBC
CIBC trades near $82 at the time of writing compared to $51 around this time in 2023. The stock had pulled back considerably from the 2022 high as investors worried that rising interest rates would trigger a recession and lead to a wave of mortgage defaults. CIBC has bet big on the Canadian housing market over the past decade and has a large Canadian residential mortgage portfolio relative to its size.
The recovery in the stock began last fall as market fears of more rate hikes switched to anticipation of rate cuts in 2024. The Bank of Canada has already reduced interest rates by 0.75%, and the U.S. Federal Reserve recently trimmed rates by 0.50%. Economists expect the central banks to continue reducing rates through next year to head off a possible recession.
At this point, markets are anticipating a soft landing for the economy. This means unemployment isn’t expected to spike. The unemployment rate in Canada has increased in recent months, hitting 6.6% in August, so investors will be watching those numbers carefully due to the risk to overstretched households if one salary disappears. In the United States, the September jobs report just came in better than expected. Unemployment actually dipped slightly to 4.1%.
CIBC’s current dividend yield is 4.4%.
Is one a better pick?
More gains could be on the way as long as inflation remains low and the economy navigates a soft landing, but both stocks have had big runs in the past year, so investors should be cautious.
New investors might want to wait for a pullback to start a position. If you decide to buy at the current levels, Manulife is probably the more attractive choice, considering the potential economic risks in Canada heading into 2025. The insurance firm is less exposed to the Canadian housing market than CIBC and has diversified operations around the globe.
