Which Life Insurer Belongs in Your Portfolio?

These stocks have been on a great run. Is it too late to buy the shares?

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

Few sectors in Canada have gone on more of a wild ride over the last 10 years than life insurance. Before the crisis, insurers could do no wrong. Then once the financial crisis came, they became known as “black boxes”, meaning it is impossible to know what’s inside them. Now they are high flyers once again.

A good case in point is Sun Life Financial (TSX: SLF)(NYSE: SLF). An investment in the company would have returned 88% from 2004 through 2007. Then over the next four years, the shares lost more than half their value. The last two years have been much better, as the shares have gone up 117%.

Overall, the shares have returned 4.1% per year over the last 10 years. But where are they headed next? And what about Sun Life’s peers?

A simple comparison

The following table compares Canada’s three major life insurers based on the price/earnings, price/book, and capital ratios.

Company Price/Earnings Price/Book Capital Ratio Dividend Yield
Manulife 13.3 1.5 248% 2.4%
Sun Life 13.9 1.6 219% 3.7%
Great-West Lifeco 13.1 1.7 223% 4.1%

Amazingly, all three companies trade at multiples very similar to each other, so it can be hard to choose between them. But Manulife Financial (TSX: MFC)(NYSE: MFC) does stand out for a couple of reasons.

First of all, its capital ratio is easily the highest among the three insurers. This is likely due to the fact that the company still has serious scars from the financial crisis, a time when Manulife desperately needed capital but struggled to raise it. Likely for the same reason, Manulife has also been the most hesitant to return capital to shareholders, which explains its low dividend yield.

Great-West Lifeco: Less capital, greater dividends

Unlike Manulife, Great-West Lifeco (TSX: GWO) was not as badly scarred by the financial crisis, which allows the company to be more comfortable with a lower capital ratio and higher dividend payout. Investors looking for a stable company with a good track record and a solid dividend would certainly prefer Great-West to the other two companies on this list.

Foolish bottom line

These companies have all seen their share prices surge over the last couple of years, but there is still a strong argument for investing in all three of them. The price-to-earnings ratios are reasonable, and they will benefit when the Bank of Canada eventually raises interest rates.

But if I had to choose a single company from this list, it would have to be Manulife. The share price does not reflect the stable capital position the company has built up, again likely due to a hangover from the financial crisis. For investors willing to forego a juicier dividend, this stock remains a very compelling option.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Investing

KM Throwaway Post

Read more »

Investing

Carlos Test Yoast Metadata

Read more »

Investing

KM Ad Test

This is my excerpt.

Read more »

Investing

Test post for affiliate partner mockups

Updated: 9/17/2024. This post was not sponsored. The views and opinions expressed in this review are purely those of the…

Read more »

Investing

Testing Ecap Error

Premium content from Motley Fool Stock Advisor We here at Motley Fool Stock Advisor believe investors should own at least…

Read more »

Investing

TSX Today: Testing the Ad for James

la la la dee dah.

Read more »

Lady holding remote control pointed towards a TV
Investing

2 Streaming Stocks to Buy Now and 1 to Run From

There are streaming stocks on the TSX that are worth paying attention to in 2023 and beyond.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Stocks for Beginners

Top Recession-Resilient TSX Stocks to Buy With $3,000

It's time to increase your exposure to defensives!

Read more »