Manulife Financial Corporation (TSX: MFC) is a holding company of the Manufacturers Life Insurance Company (MLI), a Canadian life insurance company. The Company operates as a financial services company with principal operations in Asia, Canada and the United States. The Company operates as Manulife in Canada and Asia, and as John Hancock in the United States. The Company's segments include Asia, Canada, US, Global WAM, and Corporate and Other. The product and service offerings under its segments include Wealth and asset management businesses (Global WAM), and Insurance and annuity products (Asia, Canada and the U.S.). Wealth and asset management businesses include mutual funds and exchange-traded funds, group retirement and savings products, and institutional asset management services. Insurance and annuity products include a variety of individual life insurance, individual and group long-term care insurance and guaranteed and partially guaranteed annuity products.

Revenue Mix

Source: Annual Report

• Offering a lucrative dividend yield: At the last closing price, the stock is offering a dividend yield of ~5.16%, which is lucrative amid the low-interest-rate environment. The stock’s yield is significantly higher than the TSX composite index’s dividend yield of 3.4%.

• A solid history of dividend payment: The group has a proven track record of consistent dividend payment over the past two decades. The company’s dividend payment recorded a compounded annual growth rate (CAGR) of 9%, which is gigantically higher. Amid lower interest rate environment driven by a lot of liquidity infused by the Central Banks, finding a decent yield is quite tough. Therefore, given the solid track record of consistent dividend payment, a decent CAGR in dividend payment and current lucrative yield of the company, making the stock quite an interesting bet.

Dividend History. Source: Refinitiv (Thomson Reuters)

• Robust performance in the third quarter of FY20: The group reported Net income attributed to shareholders of CAD 2.1 billion in the third quarter of FY20, up CAD 1.3 billion from the same quarter of the previous financial year. While the COVID-19 pandemic continues to disrupt economies worldwide, the overall demand for the group’s products was robust. The company’s core ROE stood at 11.4%, and ROE stood at 16.4% in the third quarter of FY20. Global WAM segment recorded net outflows of CAD 2.2 billion in the third quarter of FY20 compared with net outflows of CAD 4.4 billion in the same quarter of the previous financial year.

Source: Company Presentation

• Steady growth in global WAM AUMA: The group reported steady growth in Global WAM AUMA, primarily driven by the favourable impact of market performance and year-to-date net inflows. Third-quarter net outflows were reflecting a U.K. based redemption of CAD 5.0 billion in institutional asset management. Further, Higher Global WAM average AUMA driven by the favourable impact of markets and year-to-date net inflows of CAD 6.1 billion and an increase in Core EBITDA margin, reflecting the company’s scale and commitment towards efficiency.

Source: Company Presentation

• Trading at a discounted valuation: From the valuation standpoint, the company is trading at a Forward Price-to-Book Value Per Share (P/B) multiple of 0.78x, whereas the Industry Median Price-to-Book Value multiple stood at 1.07x, which implies a discounted valuation of 27% against the industry median. A lucrative dividend yield of 5.16% with a discounted valuation, making the stock a lucrative bet to invest in.

• Stock hovering in the bullish territory: Shares of the MFC are hovering in a bullish zone. At the last closing price, its shares traded above all the support levels. More importantly, MFC shares have traded approximately 15% above the long-term support level of 200-day SMA, which reflect that stock is hovering decently above the crucial long-term support level, making the bull trend stronger. Further, the leading Momentum Indicator, Moving Average Convergence Divergence (MACD) is rising, with the difference between 12-day and 26-day EMA is positive, which is a bullish indicator.

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

• Risk associate with investment: The company is exposed to a variety of risks, including the risk of loss from asset defaults and asset fluctuation, the risk of loss from adverse mortality and morbidity experience, the risk of loss from mismatching of asset and liability cash flows due to changing interest rates, and general business risk. The company is also exposed to volatility in the capital market and exchange rate.

Financial Highlights: Q3FY21

Source: Company Presentation

• During the third quarter of 2020, the company reported net income attributed to shareholders of CAD 2.1 billion, up CAD 1.3 billion against the same period of the corresponding previous financial year. This implies a change of 188% on a YoY basis. The increase was driven by gains from investment-related experience compared with losses in the prior year quarter, gains from the direct impact of equity markets and interest rates and variable annuity guarantee liabilities (compared with losses in the prior year quarter, which included a CAD 0.5 billion charge related to updated Ultimate Reinvestment Rate assumptions issued by the Canadian Actuarial Standards Board), and the impact of a reinsurance transaction to improve the capital efficiency of the company legacy business, partially offset by a CAD 198 million charge from the annual review of actuarial methods and assumptions.
• The company reported a core earnings of CAD 1.5 billion in the Q3FY20, a decrease of 6% compared with the same period of the previous financial period. The decrease in core earnings in the third quarter of 2020 compared with 3Q19 reflects the absence of core investment gains in the quarter (compared with gains in the prior year quarter), lower investment income in Corporate and Other, unfavorable policyholder experience in the company Canadian insurance businesses, and lower new business volumes as a result of COVID-19.
• New business value (“NBV”) stood at CAD 460 million in the third quarter of 2020, down 14% compared with 3Q19. In Asia, NBV of CAD 365 million was down 16% compared with the prior year quarter, primarily driven by lower APE sales and a decline in interest rates in Hong Kong. In Canada, NBV of CAD 67 million was up 31% from 3Q19, primarily due to higher sales volumes in large-case group insurance. In the U.S., NBV of CAD 28 million was down 38% compared with the prior year quarter, primarily driven by lower international universal life sales due to COVID-19.

Source: Company Presentation

• The company reported Global Wealth and Asset Management net outflows of CAD 2.2 billion in the third quarter of 2020, compared with 3Q19 net outflows of CAD 4.4 billion. Net inflows in Asia were CAD 1.1 billion in the third quarter of 2020, compared with net inflows of CAD 2.3 billion in 3Q19, driven by higher retail redemptions in mainland China. Net inflows in Canada were CAD 1.2 billion in the third quarter of 2020 compared with net outflows of CAD 6.9 billion in 3Q19, driven by the non-recurrence of a CAD 8.5 billion redemptions in Institutional Asset Management. Net outflows in the US were CAD 4.5 billion in the third quarter of 2020 compared with net inflows of CAD 0.1 billion in 3Q19, driven by a CAD 5.0 billion redemptions of an equity mandate in Institutional Asset Management, coupled with lower plan sales and recurring deposits, as well as higher member withdrawals in retirement.

Source: Company Presentation

• Further, the company maintained a strong capital position and significant financial flexibility, with Strong LICAT ratio of 155%.

Source: Company Presentation

Top 10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 23.25% of the total shareholding. RBC Global Asset Management Inc.  and RBC Wealth Management, International holds the maximum interests in the company at 3.57% and 3.12%, respectively.  Further, it reflects that 6 out of top-10 shareholders have increased their stake in the company over the last three months. The institutional ownership in MFC stood at 57.51%, and ownership of the strategic entities stood at 0.05%, respectively

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Book Value

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The company reported a robust performance in the third quarter of FY20, with Net income attributed to shareholders of up 188% on a YoY basis, Core ROE of 11.4% and ROE of 16.4%. Further, the group reported steady growth in Global WAM AUMA primarily driven by the favourable impact of market performance and year-to-date net inflows.

From the technical standpoint, shares of the MFC are hovering in a bullish price zone. At the last closing price, its shares traded above all the support levels.

Also, the group has a decent track record of dividend distribution, which is encouraging from an income investor’s point of view. At the last closing price, the stock was offering a lucrative dividend yield of ~5.16%.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 21.71 on November 23, 2020.

Daily technical Chart. Source: Refinitiv (Thomson Reuters)

* Recommendation is valid at November 24, 2020 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.