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.

Revenue Mix

Product Mix                                                  Geography Mix

Source: Annual Report

Investment Rationale

• An Income Play: Market expecting interest rates to remain low for a longer period. However, we believe the bond market is underestimating inflationary pressure, and the current 10-Year Government Bond yield is quite low at 1.26% for investors who are seeking a nominal rate of return on their investment and also amid times when inflation is well above the Central Bank's threshold limit. After all, long-term treasuries tend to track inflation with a small premium. We believe Manulife shares are well placed amid a lower interest rate environment for those who are looking for a nominal rate of return from their investments. Its shares are yielding approximately 4.66%, which is significantly higher compared to the bond yield.

• Proven Track Record of Dividend Distribution: The company has a track record of consistent dividend payment over the past 20-years. Also, over the last 20-years, its dividend has grown with a CAGR of 9%, which reflects the strong financial health of the business and ability to generate consistent free cash flow.

Dividend History. Source: REFINITIV, Analysis by Kalkine Group

• A Value Pick from Valuation Standpoint: MFC business model is one we think investors ought to consider from a value perspective today. The ability to receive advance premiums and invest this float in long-term securities is the kind of business every value investor would like. MFC’s current trading levels are indeed a great value deal for investors as the current valuation multiple of only nine times of earnings is dirt cheap, given the Peer’s median of 19.08 times earnings (on a TTM basis).

• Liquidity Position-Strong: 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 their businesses generate enough cash flow to sustain the company’s 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 to CAD 262.9 billion as at December 31, 2020.

• Strong Capital Levels and Financial Flexibility: The Manufacturers Life Insurance Company (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 its 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)

• Recorded Solid Earnings in Q1FY21: The group had a strong start of the year with double-digit growth across a number of key operating metrics compared with the prior-year quarter. The group delivered record core earnings of CAD1.6 billion, a 67% increase from the prior year, with double-digit growth across all of its operating segments. New business value increased 32%, with double-digit growth in Asia and the US. In the Global WAM business, core EBITDA margin increased 340 basis points as the group continued to build scale and benefited from growth in higher-margin markets. Core ROE increased by 5.5 percentage points to 13.7%.

• Risk Associated to Investment: The company business model is exposed to a range of risks, including an increase in claims, a 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 U.S., 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 of CAD 599 million recorded 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 Asia Other, 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 U.S., NBV of CAD 44 million was up 30%, primarily driven by higher sales volumes and a more favourable product mix.
• Annualized premium equivalent sales of 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 Asia Other. In the U.S., APE sales increased 13%, driven by the company’s domestic indexed universal life products and recently launched an international savings product.
• The group 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 expense efficiency ratio stood at 48.5%, compared with the target of consistently achieving less than 50%.

Top-10 Shareholders

Top-10 shareholders in the company held around 22.5% 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 Company’s assessment of the growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Manulife and John Hancock are internationally recognized brands that have stood for financial strength and integrity for more than 155 years. Manulife's size and scale translate into a substantial capital base, a diversified operating platform and ample resources to fund growth opportunities – all factors indicative of the Company's financial strength. In today's changing economic climate, liquidity is critical to all financial institutions. Manulife is fully self-funded, meaning the businesses generate enough cash flow to sustain operations without being dependent on the commercial paper markets or other short-term funding arrangements.

Further, Manulife has market-leading positions in Asia, Canada and the United States. Their diverse international operations allow them to leverage people, products, technology and expertise across the market. Moreover, the stock is offering a decent yield amid a low interest rate environment.

Moreover, from the technical standpoint, the 14-day RSI indicates that despite the recent decline in the stock from its 52 week high, the stock has not entered a bearish zone as RSI taking support near 40 and bouncing.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 24.01 on July 26, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

Technical Price Chart. Source: REFINITIV, Analysis by Kalkine

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

*Recommendation is valid at July 27, 2021 price as well.

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Disclaimer

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