2 financial stocks to buy

Credit services company goeasy Ltd. and insurance company Manulife Financial Corporation are both financial services stocks to buy for capital gains and growing dividends.

Here are two financial services stocks to buy for both long-term capital gains and growing dividends.

goeasy Ltd. (TSX—GSY)

goeasy Ltd.’s earnings are growing quickly. Even so, it’s well priced and trades at a multiple of only 11.5 times. We’ve raised goeasy’s quality rating to ‘Very Conservative’. This ‘dividend aristocrat’ has raised its dividend for eight years in a row. It remains a buy.

goeasy’s shares have fallen. But over time they’ve risen more than they’ve fallen. When the Canadian stock market bottomed in April, 2020, goeasy fell as low as $29 a share. At $138, the shares are up by nearly 376 per cent. We expect them to continue to rise.

In 2021, goeasy’s earnings jumped by nearly 38 per cent, to $10.43 a share. In 2022, its earnings are expected to go up by nearly 14.8 per cent, to $11.97 a share. Based on this estimate, the shares trade at a price-to-earnings ratio of 11.5 times. That’s low for a company whose earnings are growing quickly. The shares may even be undervalued. Nevertheless, this ‘dividend aristocrat’ is well priced.

goeasy has raised its dividend for eight years in a row. That makes it a ‘dividend aristocrat’. The current dividend of $3.64 a share is up by about 38 per cent from last year’s dividend. It yields a decent 2.64 per cent. We expect the company to continue to raise its dividend in the years ahead.
goeasy is now primarily a financial company.

The financial division continues to grow quickly. Since financial services usually generate more stable revenue than consumer stocks, we award them a higher quality rating. Accordingly, we’re upgrading goeasy’s quality rating by two notches, to ‘Very Conservative’.

goeasy expects to achieve a return-on-equity of 22 per cent from 2022 through 2024. That is, the company expects its profitability to remain high.

All stocks decline from time to time. As long as the company’s business is doing well, then there’s no need to worry. Rather than see goeasy’s price decline as a cause for alarm, we prefer to see it as a buying opportunity. In the short run, no one knows for sure where a company’s shares are headed, of course. In the long run, however, companies like goeasy that do the right things will climb in value.

goeasy remains a buy for long-term share price gains as well as decent and growing dividends.

Manulife Financial Corporation (TSX—MFC)

Manulife Financial is doing a lot of things right. That’s largely why we continue to recommend it as a buy for long-term share price gains and very attractive, growing dividends. Manulife should advance nicely over time.

One subscriber cares little for Manulife Financial Corp. He writes: “I wonder why you always recommend their stock that does not perform very well?”

The shares have risen by 124 per cent from a low of $10.66 a share almost 10 years ago. Manulife has also paid profitable and growing dividends. Its current yearly dividend of $1.32 a share provides a very attractive yield of 5.3 per cent. The OSFI (Office of the Superintendent of Financial Institutions) is letting insurers and banks resume raising their dividends. We continue to rate Manulife a ‘buy’ for several reasons.

First, it has earned more over the years. In 2021, it achieved core earnings of $6.536 billion. Its core earnings per share jumped by 18.2 per cent, to $3.25 a share. In 2022, its core earnings per share are expected to advance by 8.9 per cent, to $3.54 a share.

Second, Manulife has used its growing earnings to reward its shareholders. It raises its dividends. The company also buys back its own shares. This can reduce the number of average diluted shares outstanding. Spreading the earnings over fewer shares automatically increases its earnings per share of course. All else being equal, higher earnings per share can justify a higher share price.

Third, Manulife is diversified around the world. Its biggest market is Asia, where last year’s core earnings hit $2.176 billion. There is enormous growth potential in Asia. Manulife’s geographical diversification also reduces its exposure to any one country. Similarly, its diversification across many financial services reduces its risk.

Benjamin Graham, the father of fundamental security analysis, once said that in the short run, the stock market is a ‘voting machine’. But in the long run, it’s a ‘weighing machine’. Trying to accurately predict the very short-term direction of a stock’s price is impossible. But in the long run, the share price of a company doing a lot of the right things is quite likely to go up. A weighing machine beats a voting machine. We think that Manulife is doing a lot of things right. That’s why we continue to rate it a buy for long-term share price gains as well as very attractive and growing dividends. Rising interest rates are also positive for insurers and banks.

This is an edited version of an article that was originally published for subscribers in the March 2022/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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