The Better Buy in Life Insurance

By Chad Henage - May 29, 2012 | Tickers: MFC, SLF | 0 Comments

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You've probably seen the commercials for Sun Life Financial (NYSE: SLF). The company pretends to pitch a name change for someone like “KC and the Sunshine Band” to “KC and the Sun Life Band.” The company says sooner or later you'll get to know us. The fact that the advertising is clever and memorable makes it good, but what's behind the advertising? Buying what you know, is a tip that Peter Lynch gave years ago and still makes sense today. What better than to buy stock in the company with the great commercials? However, as Lynch often did, investigating Sun Life's competitors can turn up some promising names as well. This lead me to check out the lesser known Manulife Financial (NYSE: MFC). Which one is the better value? That's what we are here to find out.

Apparently Wall Street doesn't know Sun Life or for that matter Manulife very well. I say that because not only do both stocks sell for below their expected growth rate, but as we'll also see, analysts haven't been able to get a bead on what the companies will earn. It looks like a tie with a separation of just 0.04 in the PEG ratios of each company. (Sun Life – 1, Manulife – 1)

Earnings performance is very important to the valuation of a stock. Companies that beat earnings estimates are rewarded with a higher multiple as investors begin to expect higher growth. Both companies show a good history versus analyst estimates, but one has done better: 

Manulife has the better track record by far. The company has not missed earnings as many times, and their average beat versus estimates is over 31%. This tells us that analysts could be understating the future growth of the company. (Sun Life – 1, Manulife – 2)

If you are looking for yield, you could hardly go wrong picking either company. However, yield doesn't give us the whole picture. Let's compare the two on yield, payout percentage, and dividend growth to try and get a better overall view. 

You can see that in two of the three metrics Sun Life performs better. With a higher yield, positive growth in the dividend, and a still very low payout ratio, it really isn't much of a contest. (Sun Life – 2, Manulife – 1)

Another area where I found that Sun Life is doing much better is their investment portfolio. In the last three years, Sun Life's long-term investments have grown by an average of 5.17%. On the opposite end of the spectrum, Manulife has actually seen an average decrease of 9.74% in their long-term investments. Since investments make up a large amount of how insurance companies make their money, growth is paramount. (Sun Life – 2, Manulife – 1)

Last we'll compare the two company's balance sheets. Peter Lynch said that for financials he used the equity-to-assets ratio to determine the company's financial strength. He was looking for a ratio of at least 6%. Both companies score above 6%, but Manulife has the better ratio at 12.27% compared to Sun Life at 7.20%. Not only do companies with higher equity ratios have a cushion if losses occur, but a company with a higher equity-to-assets ratio could be a more attractive takeover target as well. (Sun Life – 1, Manulife – 2)

The totals are Sun Life – 7 and Manulife – 7. It's a tie! While each category is equally weighted, there are some that carry more weight in my mind. If I had to choose, I would pick Sun Life. The company has the higher dividend yield, and a positive dividend growth rate. Sun Life might not be beating analyst estimates by a mile, but the stock sells for a slightly lower multiple. While Sun Life's balance sheet isn't as strong as Manulife, they do show positive growth in long-term investments. Investors hungry for yield should take a serious look at Sun Life. They say that sooner or later you'll get to know them. I wouldn't wait until later, once more investors catch on that their yield is sustainable, their stock won't stay undervalued for long.

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