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Stock Analysis - Manulife Financial (MFC)

Initial Screening

Manulife Financial Corporation - more commonly known as simply Manulife - is the largest insurance company in Canada and in the top 30 of the largest fund managers worldwide based on assets under management. Founded in 1887, Manulife provides insurances and financial services for mainly North American and Asian clients.

Its peer group consists of Sun Life Financial (TSE:SLF / NYSE: SLF) and Great-West Lifeco (TSE: GWO.TO) on a national basis and MetLife (NYSE: MET), AXA (EPA: CS), and Allianz (ETR: ALV) when looking beyond the Canadian borders.

Though any financial figures quoted throughout this article will be referenced in USD, Manulife Financial Corporation is traded on both the Toronto Stock Exchange (TSE: MFC) and the New York Stock Exchange (NYSE: MFC). This dual-listing allows convenient access to the stock for both US and Canadian based investors.

Manulife infographic
 

Business Model

Manulife makes the lion's share of its Canadian business as a provider of life, health and disability insurance solutions on both business-to-business and business-to-consumer levels. Adding to that, MFC offers annuity products as well as bank services covering everything from checking accounts to lines of credits and loans.

In the US, Manulife offers only insurance and annuity solutions under the John Hancock brand, a company they acquired in 2014. Their products and solutions are primarily sold through licensed financial advisors leaving little room for direct-to-consumer business.

Manulife's third geographical region is focused on insurance-based products in Asia. Having access to 12 regional markets with a high population and GDP growth it’s also one of their biggest drivers of growth. Apart from insurance, annuities and bank services, Manulife is one of the top 30 asset managers ranked by assets under management worldwide. Under the Manulife Investment Management brand, it serves both individual and institutional clients in North American and Asian markets with investment products.

The graphic below highlights and summarizes Manulife’s business on their Investor Day in 2018:

Manulife Regions
 

Dividend Growth and Sustainability

Manulife’s dividend yield as of 09/12/2020 is 5.88%, considerably attractive for investors seeking a high starting yield.

The following section will cover some history on and judge the sustainability of Manulife’s dividend by examining the payout ratio as well as its growth to determine whether the insurance giant makes a compelling case for dividend growth investors.

Dividend History & Growth

Manulife has paid out a quarterly dividend consistently since 2000, the year after first listing shares for the public in 1999. Though there has been some dividend cutting and freezing in the aftermath of the financial crisis in 2008, MFC is now considered a Canadian Dividend Aristocrat and a US Dividend Challenger with a current dividend growth streak of 7 years.

Within the last decade, between 2010 and 2020, the dividend per common share has been increased by just under 120%. Most of this growth was contributed by the annual dividend growth especially in the last 5 years, as the dividend was frozen between 2011 and 2013.

The latest increase was announced on February 12 this year at a rise of 12%, fitting nicely into the double-digit dividend growth trend seen over the past 5 years.

Payout Ratio

Between 2011 and 2019, Manulife's dividend payout ratio has been hovering steadily around 50%. With outliers in 2018, when it hit 70%, and 2014 when it dropped as low as 25%.

The 5-year-average payout ratio is 53.21%, suggesting to me that the company's dividend remains safe and the dividend growth aligns with growth in EPS.

Financial Analysis

Using the Piotroski F-Score to measure Manulife’s current financial health, we see it secures a 6 in the 0-9 ranking. This leads me to consider MFC as a relatively stable company. However, year over year investors observed a slightly lower current ratio (current assets divided by current liabilities) and a lower return on assets.

From a debt perspective, the debt to equity ratio for Manulife is around 55.6% and can be considered high, but it is well covered by their operating cash flow (at 67.7%). Furthermore, interest payments are covered by EBIT at a 4.4x coverage-rate.

However, to see the full picture of the impact of the pandemic I’m looking forward to their 2020 investor day, which has yet to be rescheduled.

Investment Case

In the following section, we will dive into the company's Moat as well as Bull and Bear cases to outline which headwind the company might face while providing insight into their strategy and growth opportunities.

Moat

Manulife financial is a Top 10 life insurance company by market capitalization. Its rich history of business in Asia has opened the door into 12 markets within that region allowing access to one of the fastest-growing markets by population as well as GDP.

On the asset management side, their moat is generally impacted by switching costs for entities currently invested using Manulife’s products. While they aren’t necessarily high they will add another barrier to investors leaving the band in order for potentially higher results with other institutions.

The Bull Case

Manulife still has growth potential in the Asian markets. The company's 100 plus year history in the Asian market has given it a competitive edge over most western insurance players seeking an entry into this emerging economy.

From a short-term point of view, a prolonged public health crisis like the Covid-19 pandemic could lead consumers into buying more health and life insurance - Manulife’s bread and butter. On the other hand, this potential short-term increase on a consumer-level looks different for business insurances, leading us to our bear case.

The Bear Case

A bear case can be made not just for MFC but the insurance sector as a whole since it is one of the sectors hit hardest in the case of a recession or emergency, like the pandemic we’re currently experiencing.

Looking back at the pandemic and correction in March 2020, shares of Manulife lost over 50% of its initial value due to economic uncertainties and potential claims during this time.

With a potential second wave and prolonged economic impacts in Manulife’s main markets of Asia and North America, the full picture for insurance companies has yet to be painted. With some insurances being viewed as often optional purchases, it may very well be one of the first expenses consumers and businesses alike cut when not mandatory.

Conclusion

Even in times of uncertainty, I trust the proven management of Manulife as a dividend growth investor. With a price to book value of just 0.9 and a decent global footprint with strong roots in Asia, I think the company is set up for future success as economies around the world begin to recover and start growing again.

That said, don’t expect the high dividend growth of the most recent years to continue in a prolonged economic recession. Manulife has proven in the past that dividend growth is not one of their focus points, as they cut the dividend in the financial crisis in 2008 and froze it between 2011 and 2013.

I recommend potential investors browse through the documents found on Manulife’s investor relations page.

Thank you for taking a look at my stock analysis of Manulife Financial Corporation. I invite you to share any feedback you have to offer to help me improve future stock analysis and research!

Disclaimer

I hold a long position in Manulife Financial Corporation (TSE: MFC). This article expresses personal opinions and observations of someone who is not licensed to provide financial advice.

I am not receiving compensation for writing this analysis and have no business relationship with any company whose stock is mentioned in this article other than the long positions I own. Furthermore, I cannot guarantee the accuracy of the financial metrics gathered from 3rd party services like Morningstar and Yahoo Finance.

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