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.

• A Consistent Dividend Payer: MFC shares are offering a lucrative dividend to the shareholders, as its shares are yielding ~4.5% at the last closing price. More importantly, the company has a past track record of consistent dividend payment over 20-years, and in the same time interval, the company has recorded a dividend payment compounded annual growth rate (CAGR) of 9%, which is noteworthy. Amid the lower interest rate environment driven by a lot of liquidity infused by the Central Banks, finding a decent yield is quite tough. Therefore, with more than two decades track record of dividend payment, a decent growth in dividend payment, and current lucrative yield makes MFC’s stock quite an interesting bet for the investors.

Dividend History. Source: Refinitiv (Thomson Reuters)

• A High Quality, Diversified Investment Portfolio: Manulife has always followed a prudent investment approach – avoiding complexity, setting limits, diversifying, and applying a healthy dose of skepticism in all the credit decisions. This philosophy continues to serve the group well. The invested assets totaled CAD 397.9 billion as of March 31, 2021 and included a variety of asset classes that are highly diversified by geography and sector. This diversification has historically produced superior returns while reducing the overall portfolio risk. Approximately 84% of the total portfolio is in Fixed income securities, of which 97% is Investment Grade. Alternative long-term Duration assets are diversified by asset class and geography, historically generated enhanced investment yields without having to pursue riskier fixed income strategies and equity-like returns with significantly lower volatility than public equity. The company’s public sector portfolio Diversified by industry and geography and primarily backing participating or pass-through liabilities.

Source: Quarterly Report (Q1FY21)

• Strong Liquidity Position: In today’s changing economic climate, liquidity is critical to all financial institutions, and Manulife is quite prudent on this front, with significant liquidity at the end of March 31, 2021. Manulife is fully self-funded, meaning the businesses generates enough cash flow to sustain the operations without being dependent on the commercial paper markets or other short-term funding arrangements. As of March 31, 2021, the company held CAD 249 billion in cash & cash equivalents, comprised of cash on deposit, Canadian and U.S. Treasury Bills and high-quality short-term investments, and marketable assets comprised of investment-grade government and agency bonds, investment-grade corporate bonds, investment grade securitized instruments, publicly-traded common stocks and preferred shares, compared with CAD 262.9 billion as at December 31, 2020. 

• Delivering Solid Risk-Adjusted Return: The group continue to manage its product offerings and product mix in order to produce high risk-adjusted returns. Equity market sensitivities and interest rate sensitivities are diligently managed within established, Board-approved risk appetite and limits. The interest rate and equity market sensitivities have decreased significantly since 2009 with the implementation of robust hedging programs. As of March 31, 2021, the company’s earnings sensitivity to a 10% decline in equity markets was CAD (580) million. On March 31, 2021, the group estimated its earnings sensitivity to a 50-basis point parallel decline in interest rates to be CAD 100 million. 

• Strong Capital Levels and Financial Flexibility: MLI ended the first quarter of 2021 with a LICAT ratio of 137%, well above the supervisory target of 100%. Strong capital levels are also a good measure of financial strength. Having a large capital base enables the group to sustain strong credit ratings, finance new opportunities, and most importantly, maintain the commitments to the policyholders.

• Investment Grade Rating Profile: Manulife Financial Corporation is a leading international financial services group with internationally recognized brands that have stood for financial strength and integrity for more than 155 years. The ratings are a comprehensive measure of financial strength. Manulife has strong financial strength ratings from AM Best, DBRS, Fitch, Moody’s and S&P.

Source: Quarterly Report (Q1FY21)

• Delivered Record Core Earnings in Q1FY21: The group had a strong start with double-digit growth across a number of the key operating metrics compared with the prior year quarter. The group delivered record core earnings of CAD 1.6 billion, a 67% increase from the prior year, with double-digit growth across all the operating segments. The company reported net income of CAD 783 million, reflecting the immediate impacts of the steeping yield curve and higher risk-free rates. It's worth noting that a higher interest rate environment is beneficial to Manulife's business in the long term.

• Risk Associated to Investment: The company business model is exposed to a range of risks including increase in claims, large swing in interest rates, and volatility in the other speculative asset classes.

Financial Highlights: Q1FY21

Source: Company Filing 

• The group has delivered decent core earnings of CAD 1.6 billion in 1Q21, an increase of 67% compared with 1Q20. The increase in core earnings was driven by the favourable impact of markets on seed money investments in new segregated and mutual funds (compared to losses in the prior-year quarter), higher new business gains in Asia and the US, and the recognition of core investment gains in the quarter (compared with nil core investment gains in the prior-year quarter).
• During the quarter, New business value stood at CAD 599 million, an increase of 32% compared with 1Q20.
• In Asia, NBV increased 39% to CAD 477 million driven by higher sales volumes and product management actions in Hong Kong and higher sales volumes and favourable product mix in other Asia, partially offset by lower sales volumes and unfavourable product mix in Japan from a shift to lower margin corporate-owned life insurance (“COLI”) products.
• In Canada, NBV of CAD 78 million was consistent with the prior-year quarter, as a more favourable product mix offset the impact of lower APE sales in Individual Insurance. In the US, NBV of CAD 44 million was up 30%, primarily driven by higher sales volumes and a more favourable product mix.
• Annualized premium equivalent sales stood at CAD 1.8 billion in 1Q21, an increase of 14% on a YoY basis, with Asia, APE sales increased 22%, driven by growth in Hong Kong and Other Asia. In the US, APE sales increased 13%, driven by domestic indexed universal life products and recently launched international savings product.
• The company reported Global Wealth and Asset Management net inflows of CAD 1.4 billion in 1Q21, compared with 1Q20 net inflows of CAD 3.2 billion.
• During the quarter, the company reported net income attributed to shareholders of CAD 783 million, down CAD 513 million from 1Q20. The decrease reflects losses in 1Q21 from the direct impact of markets driven by the steepening of the yield curve in North America (compared with net gains in 1Q20 related to spreads partially offset by losses related to equity markets), partially offset by higher core earnings and improved investment-related experience (gain in 1Q21 compared with losses in 1Q20).
• Further, Investment-related experience in 1Q21 reflected higher-than-expected returns (including fair value changes) on alternative long-duration assets primarily due to fair value gains on private equity investments partially offset by lower-than-assumed returns on real estate, the favourable impact of fixed income reinvestment activities and favourable credit experience.
• The company reported a strong LICAT ratio of 137%.
• The expense efficiency ratio stood at 48.5%, compared with the company’s target of consistently achieving less than 50%.

Top-10 Shareholders

Top-10 shareholders in the company held around 23.01% stake. RBC Global Asset Management Inc. and The Vanguard Group, Inc. are among the largest shareholder in the company and carrying an outstanding position 3.09% and 3.04%, respectively. The institutional ownership in “MFC” stood at 60.36%, and ownership of the strategic entities stood at 0.05%.

Valuation Methodology (Illustrative): Price to Book Value Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation:

The group delivered a strong operating result in the first quarter of 2021, driven by double-digit growth in core earnings across all the operating segments. While the overall impact of higher interest rates is positive over the long term for the company, higher risk-free rates and a steepening yield curve within North America impacted net income in the quarter.

Further, despite ongoing challenges presented by the pandemic, the global strength and diversity of the business continue to shine through. MFC is progressing on its digital transformation with auto-underwriting at 72%, straight-through-processing at 81% and eClaims at 92%.

The company delivered 14% growth in APE sales, driven by a strong result in Asia and continued demand for the innovative Vitality solution in the US. Amid challenging times, the group generated net inflows of CAD 1.4 billion in the Global Wealth and Asset Management business, supported by strength in the Retail and Retirement businesses.

The group is a friend of income investors as it has a strong track record of dividend distribution. Moreover, at the last traded price, the stock was offering a decent dividend yield amid a low interest rate environment.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 24.82 on May 21, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

1-Year Price Chart (as on May 21, 2021). Source: Refinitiv.

*Recommendation is valid at May 25, 2021 price as well.

Disclaimer

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