On a fundamental basis, a number of high-quality blue-chip stocks have recently become great value due to this Coronavirus pandemic. In the insurance space, most companies have been adversely affected. Manulife Financial Corp. (TSX: MFC)(NYSE: MFC) is no exception.
Companies like Manulife earn returns on their actual under writing business. These margins are typically only a piece of their overall earnings. This is because insurance companies tend to make a significant percentage of their earnings from investment income; that is, investing their float or premiums they receive prior to having to dole out money in claims.
This investing income relies heavily on a fixed income securities like bonds or annuities, instruments which are extremely sensitive to interest rate movements. Because insurance companies don't trade these securities, but rather, typically hold them to maturity for their yield/coupons, a declining interest rate is not good for their bottom line.
This weakness in interest rates, and the corresponding effect on the bottom line of Manulife and other insurers is already baked into the company's share price now. Manulife has a forward P/E of around 5, at the time of writing, which is a low valuation and one which is at a discount to other large financial firms such as banks.
Most analysts believe Manulife’s dividend should be safe due to relative near-term balance sheet strength, and while anything is possible, I’d suggest value investors looking for income or long-term retirement-style holdings to consider Manulife at these prices.
Invest wisely, my friends.
