Manulife Financial (MFC.TO)

A very well-run business, particularly after a number of years of underperformance relative to the banks. Lifecos are poised to outperform the Canadian banks as they have a lot of sensitivity to rising interest rates. If you believe we are in a period of reflation and rising interest rates, lifecos are a great way to play that. Also, this company has a great, global footprint.

Canada’s largest life insurer. He likes this for the geographic balance, operating in Canada, the US and a large and growing presence in Asia. They are quite profitable. He sees a clear path to improving returns on shareholders’ equity, which is very highly correlated with the valuation multiple that investors are willing to put on the stock. Their reinvestment prospects will get better and better as interest rates go up. There is still more room to run with this company.

He was adding to his positions at the $17 level. Now the question is, how fast do interest rates rise, how far do the rise, and how much does it help them. On their most recent quarter, their core earnings beat estimates and were better than expected, but their headline earnings were $.01, because they lost a lot of money on hedging and interest rates. That is short term. He likes this for the long-term, but would be looking for a better entry point in the low $20s. 3.3% dividend yield.

Lifecos? He owns Sun Life (SLF-T) and Manulife (MFC-T). The problem with life insurance companies, especially when interest rates are getting so low and negative, how do you fund long-term liability? That has been a conundrum. When there started to be a turn in interest rates, suddenly lifecos became more interesting investments, and he added to his holdings. Because of the big move, he has taken a bit of money out recently. He likes their growth, but valuations are at the higher end and expectations of higher interest rates are a little too bullish. He would recommend that you take some profits like he did.

(A Top Pick Feb 16/16. Up 53.83%.) A year ago, people were looking at negative interest rates, which was a disaster scenario for the lifecos. He still likes the growth story here.

Short term MFC-T with more increases in interest rates, deserves to be at $34.38, with his model price at $34.58.

All insurance companies do better in a rising interest rate environment. They also do very much better if they are selling equity type products, which they all do. Any increase in North American equity markets is good for the companies. He feels this company has too much of their future growth tied up in Asia, and he doesn’t trust the Asian markets. (See Top Picks.)

He still likes it. Interest rates are going to go higher especially with infrastructure. He likes that it got hurt in the financial meltdown. There is room for dividend growth and upside from the trend of rising interest rates. He wants it in addition to banks. (Analysts’ target: $26.61).

As interest rates have moved up, it has been helpful in lifting this stock. Rising interest rates will be a feature in the medium to longer term, but in the short term, REITs have gone about as far as they can go.

Ran into serious problems during the financial crisis and had to cut the dividend in half. They had to restructure, not only their balance sheet, but also their product line. They’ve made huge inroads expanding geographically. Although it has appreciated recently, it is a company that will appreciate very well in a rising interest rate environment. Has a very strong operations in the US. Their sales in Asia have been doing extremely well. Believes we are going to be seeing more dividend increases, probably in the near term. Dividend Yield of 2.96%. (Analysts’ price target is $26.61.)

He likes the look of this. Insurance companies have all had a big move post election, on the premise that we are going to see increased rates. They’ll be big benefactors of that. A dividend increase is a very likely possibility. It’ll be modest and not likely as large a magnitude as the past 3 years. Valuations are very reasonable. Dividend yield is 3%, which is certainly adequate to hold in this environment. This and Sun Life (SLF-T) have the biggest exposure to international markets, which is going to be a key to them.

The chart shows this recently completed a base pattern, and then started moving higher. It is now testing its all-time high, so technically it looks very, very good. This looks like a winner.

This is really growing well in Asia. He models a 12% EPS. Last quarter was a beat. 9% dividend growth. Still trading below its peers. Trading at 13.1X 2016, which isn’t bad relative to the TSX. Very strong balance sheet. They benefit from really good FX tailwinds to the Cdn$. They’ve taken some recent actuarial charges against their long-term care unit, which should make their quarters quieter going forward. This is an interest rate play, so as interest rates start to go higher, they should benefit. Dividend yield of 3.04%. (Analysts’ price target is $25.83.)

Manulife (MFC-T) or Sun Life (SLF-T)? As interest rates started going up, they have done well in the last little while. To him, Sun Life is a much more stable company. This company has a really great Asian franchise which can drive their business a lot more than Sun Life’s.

(Top Pick Feb 25/16, Up 42.24%) He does not expect this kind of run in this time frame, but he looks for undervalued opportunities. MFC-T was unique in that they had a rough quarter and yet still increased their dividend. Rising interest rates and a steeper yield curve really benefitted them.