The search for truly undervalued stocks to buy today and hold for both capital appreciation and dividend income over time is one that’s worth pursuing. In the Canadian market, there happen to be a number of top names worth considering in this regard. One company I’ve touted for a long time as a value stock with promise is Manulife Financial (TSX:MFC). And notably, this is a stock that has significantly outperformed many of its peers over the past five years – the chart below is impressive.
Let’s dive into whether this appreciation can continue, and where Manulife could be headed from here.
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Interest rates matter
For Manulife investors, this higher interest rate environment has been a net positive. The company’s core business operations centres on its insurance products (namely, life insurance), which typically carry long-duration risks. Manulife typically matches its future liabilities with investments that match long-duration bonds.
With yields rising, Manulife is able to earn a higher return on its investment portfolio. And this comes at a time when insurance rates are rising across the board. Accordingly, for this geographically diversified operator (with fast-growing operations in Asia and various markets around the world), globally higher interest rates have been a good thing.
There’s more to Manulife than insurance
The company is also a key provider of wealth management services and a range of financial products to its growing clientele. One of the largest insurers in Canada (covering more than 35 million customers globally), Manulife’s strength as a true financial giant will only improve as its influence and user base grows.
In addition to insurance, the company provides annuities, mutual funds, education savings plans, individual retirement savings plans, investment-linked products, and group retirement savings plans. Manulife’s products are marketed and distributed through independent agents, contracted agents, financial advisors, bank partnerships, and brokers.
Why is this undervalued stock worth buying here?
From a valuation perspective, Manulife has certainly gotten more expensive, now trading at around 15 times earnings. When I’ve covered this stock in past years, MFC stock typically traded sub-10-times earnings, so that’s a relatively big move higher.
The thing is, I think the multiple expansion Manulife has seen is very much warranted. The company’s core earnings rose 16% on a constant currency basis this past quarter, with Manulife’s earnings per share exceeding this amount, surging 20% year-over-year. That’s some impressive growth, and the implied margin expansion is certainly nice for investors looking for balance sheet and cash flow stability.
The company’s strong capital position, improved growth projections, and growing wealth management business in Asia are among the key reasons I think it’s worth loading up on this stock providing a 4.4% dividend yield for investors who are patient. This is a stock I think investors can own and forget about, and generate a nice passive income stream along the way. That’s hard to beat right now.
