It seems like a foregone conclusion that rates will rise at some point this year. The economy is bouncing back, the jobs situation is rapidly approaching full employment and inflation is ticking close to the 2% target.
This means that it may be time for investors to start considering plays that are poised to benefit from a rising rate environment. Financials are a top pick in this regard and they are likely going to be top performers if rates do rise.
Why financials?
For financial companies, a wider spread between short term and longer term rates can lead to bigger profits. And when matching liabilities to assets, higher rates tend to bring in more income which is obviously good news for companies in the space. Take for example the insurance sector.
This space will match up liabilities (payouts) and assets (investments) and it can be a big fan of bond investing. And as rates rise for the benchmark rate, so do they for other types of debt, increasing the profit potential for insurance companies. After all, the payouts don’t really change as the interest rates rise or fall, but the income from the invested assets certainly can.
Due to this trend and the prospect of higher rates, the insurance-life segment of the investing world currently has a promising Zacks Industry Rank just outside the top 40%. But if you are looking for the best-of-the-best in this segment, definitely take a closer look at Sun Life Financial (SLF - Analyst Report) as this could be a stock to outperform in this well-positioned corner of the financial world.
SLF in Focus
Sun Life is a Canadian-based life insurance company that basically has five major divisions; Canada, Asia, U.S., UK, and then its wealth management group. The company derives the bulk of its net income from the Canada and wealth divisions combined, though Asia and the U.S. contribute double digit levels as well.
The company has seen solid results in terms of sales for both its insurance and wealth management divisions, and it maintains double digit readings in terms of ROE. The company has also recently repurchased three million common shares and hiked dividends too, pushing the yield north of 3.6% in the process.
SLF is definitely moving in the right direction and this is further confirmed by looking at recent earnings estimates by covering analysts who follow the stock the closest.
Earnings Estimate Changes
Recent earnings estimates have been on the rise for SLF and we have seen a 3:1 (positive: negative) ratio as of late for the company’s full year and next year metrics. The magnitude of these revisions has also been impressive as it has gone from $2.45/share 60 days ago to $2.71/share today for the full year, and then a 28 cent per share increase for the next year time frame.
SLF is now projected to have stable, solid EPS growth of about 8% per year, and with a pretty good track record at earnings season, there is plenty of hope that this company can live up to the hype. After all, it has beaten in three of the last four quarters while it has produced an average surprise of about 7.4% in the time frame.
If this wasn’t enough, we should also note that SLF has earned itself a ‘B’ grade for value, making it a compelling choice for these types of investors, and especially when you consider their solid dividend. No wonder we currently have Sun Life Financial as a Zacks Rank #1 (Strong Buy) and are looking for it to outperform this summer.
Bottom Line
Rates are likely going to be on the rise soon and it is important to consider how this might impact your portfolio. While many areas might be hurt by this trend, one segment that could easily benefit is financials thanks to their pro-rate hike structure and their desire for wider spreads in the rates.
SLF is one such company that appears to be well-positioned for this trend and it is one that investors definitely need to consider right now. Not only does it have rising earnings estimates and a top Zacks Rank, but it also possesses a great value grade and an impressive dividend making SLF tough to beat.
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