Forget the Big 6: 1 Canadian Financial Stock With Massive Upside

When everyone crowds into the Big Six, Canada’s top insurer can be the quieter way to get defensive growth.

Key Points
  • Intact Financial sells must-have insurance, so premiums keep coming in even when the economy slows.
  • Higher interest rates can boost insurers’ investment income, helping Intact grow earnings outside of underwriting.
  • Intact trades at a reasonable multiple and keeps raising its dividend, but catastrophe losses remain the key risk.

Canadians can be tempted to flock to the Big Six banks during times of trouble. Yet here’s the problem: so does everyone else! Sure, these banks are super safe and have a long history of growth over decades. But that doesn’t mean they’re the best buy, and, indeed, they can drop after a period of volatility when Canadians decide to put their cash elsewhere.

That’s why insurance stocks might be a better buy on the TSX today. These can often outperform banks during volatile periods as they benefit from higher investment income and more diversified revenue streams. So, let’s look at one solid option out there.

pig shows concept of sustainable investing

Source: Getty Images

IFC

Intact Financial (TSX: IFC) is a great place to start if you’re an investor looking outside the Big Six banks. IFC stock remains overlooked, despite massive long-term returns of 55% in the last five years alone. Of course, that comes with shares down about 10% year to date.

But I digress. Let’s look at why IFC stock belongs on an investor’s radar. IFC stock is Canada’s largest property and casualty insurer. It operates through Intact Insurance, BrokerLink, belairdirect, and RSA operations in the U.K. and Ireland.

Now, of course, insurance isn’t glamorous, but Canadians need auto, home, and business insurance no matter what happens in the economy. Due to this, IFC stock has steadily expanded through acquisitions, especially the RSA Insurance acquisition completed in recent years. Now, IFC stock generates billions in premiums across Canada, the U.K., Ireland, and specialty markets, recently topping out at $24 billion.

Into earnings

So, let’s look more into those numbers. During its most recent quarter, IFC stock reported operating earnings per share (EPS) at about $4.94, with net operating income up to about $885 million. 

Furthermore, direct premiums written increased 5% year over year, with investment income surging as insurers benefit from higher interest rates on bond portfolios. And unlike banks, IFC stock earns more from investing premium float during higher-rate environments. 

All this, and IFC stock still trades at just 13.6 times earnings, and a dividend yield at 2.3%. Yes, lower than banks, but comes with a stronger dividend-growth potential, and on the back of two decades straight of dividend increases, and, of course, buy-backs.

Looking ahead

I may not have a crystal ball, but there are a few things to watch for IFC stock in the near and distant future. Insurance pricing remains favourable, allowing IFC stock to continue pushing through premium increases. IFC stock’s scale also gives it advantages in pricing, claims management, and technology investments.

Furthermore, IFC stock continues expanding in specialty insurance, which carries higher margins. That alone brings up long-term opportunities, yet the addition of digital insurance growth through belairdirect and BrokerLink add to this. In fact, analysts believe there should be double-digit earnings growth even though IFC stock is already worth more than $50 billion.

Of course, it’s not likely to be a straight line upwards. Catastrophe losses always remain the biggest risk for insurers, especially in a world affected by climate change. Plus, lower interest rates in the future could reduce its investment income growth. Even so, IFC stock has navigated these issues in the past, in many ways better than its peers. 

Bottom line

If you’re looking to move away from the Big Six banks, IFC stock is a great way to get just that. The insurer combines defensive earnings, pricing power, global diversification, and long-term growth. All while offering income from even a $7,000 investment from dividends.

COMPANYRECENT PRICENUMBER OF SHARESANNUAL DIVIDENDANNUAL TOTAL PAYOUTFREQUENCYTOTAL INVESTMENT
CM$256.0127$5.88$158.76Quarterly$6,912.27

So, for investors looking beyond banks, IFC stock offers the kind of upside and resilience that’s hard to ignore right now.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Intact Financial. The Motley Fool has a disclosure policy.

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