Company Profile: 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.

Investment Rationale

• An Income Play : MFC shares are offering a lucrative dividend to the existing as well as potential shareholders, as its shares are yielding 4.56% at the last closing price. MFC dividend yield is significantly higher compared to US 10-Year Treasury Bond Yield of 1.68%. Moreover, the company has track record of dividend payment and dividend growth over the past 20-years. Therefore, a high yielding quality insurer together track record of consistent dividend payment and dividend growth tend to keep its shares in the income seeking investor’s limelight.

Dividend History, Source: REFINITIV

• Solid Second Quarter Performance: Manulife’s strong momentum continued in the second quarter of fiscal 2021, as the company delivered record core earnings of CAD 1.7 billion, surged by 18%on a YoY basis, and Net Business Value (NBV) increased 57% on a YoY basis, with strong contributions from all geographies. Further core EBITDA margin increased by 4% on a YoY basis which has  contributed to core earnings growth of 62% in Global Wealth and Asset Management.
• Strong Capital Levels and Investment Grade Credit Rating: The group ended the quarter with a LICAT ratio of 137%, well above the supervisory target of 100%. The ratio is in-line with the prior quarter, as favourable impacts from market movements. Further a strong capital levels is a good measure of group’s financial strength and  having a large capital base allows MFC to sustain strong credit ratings. The company has assigned investment grade credit rating from AM Best, DBRS, Fitch, Moody’s and S&P. 

Source: Company Presentation

• Generating TTM ROCE Above Peer’s Median: The company is generating relatively higher TTM Retun on Common Equity (ROCE) of 14.8% compared to industry median of 11.5%. A relatively higher ROCE suggests that the company’s management team is more efficient when it comes to utilizing investment financing to grow their business, this gives a strong competetive edge to the MFC shareholders over the competetion.

• Bullish Momentum Indicators: Leading momentum indicators, MACD is rising, with the spread between 12-day and 26-day EMA is positive. This is a bullish indicator. Further, 14-day RSI is hovering in a neutral zone with bullish bias at 51.79.

Technical Price Chart (as on October 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Hovering Above Crucial Support Levels: On the daily price chart, CAD 23.35 level is acting as strong demand zone for the stock, as MFC shares are holding this level since April 2021. Further, in the last trading session, its shares registered a crossover above 21-day and 50-day SMA, a bullish price move which brought MFC shares into short-term bullish zone.

 Technical Price Chart (as on October 08, 2021). Analysis by Kalkine Group

Risk Associated to Investment

The company is primarily exposed to the volatility in the capital market asset prices, any adverse move could have a substantial negative impact on the group’s health, including  reduction in average asset under management, higher redemption requests, drop in core earnings and others. MFC business is also exposed to forex risks given the considerably higher exposure of the company in the global equity and debt markets.

Financial Highlights: Q2FY21

Source: Company Filings

• Delivered 18% Jump in Core Earnings: During the second quarter under consideration, the company reported core earnings of CAD 1.7 billion, a jump of 18% on a YoY basis, driven by higher new business gains across all insurance segments and higher net fee income from higher average Assets under management and administration (AUMA) in Global WAM.
• APE Sales up 30%: Annualized premium equivalent (APE) sales of CAD 1.4 billion in Q2FY21, up 30% on a YoY basis, drive by 34% surge in Asia APE sales and 66% surged in Other Asia APE sales.
• Improved Efficiency Ratio: During the second quarter of FY21, the company’s reported expense efficiency ratio was 46.8% for Q2FY21, compared with 48.9% in Q2FY20, improvement was mainly on account of a 16% increase in pre-tax core earnings and a 5% increase in general expenses included in core earnings.
• Financial Leverage ratio Remain Strong: As on June 30, 2021, MFC’s reported financial leverage ratio stood at 25.9%, a decline of 3.6% from 29.5% as at March 31, 2021, mainly on account of the redemption of debt and capital instruments of CAD 2.1 billion, growth in retained earnings, and the favourable impact of lower interest rates on the value of AFS debt securities
• Reduction in Cash and Cash Equivalents: As on June 30, 2021, the company’s reported cash and cash equivalents and marketable securities stood at CAD 254.6 billion compared with CAD 262.9 billion as at December 31, 2020. The reduction was primarily driven by the impact of higher interest rates on the market values of fixed income instruments.
• NBV Soared by 57% on a YoY basis: New business value (NBV) during the quarter under review surged by 57% to CAD 550 million driven by 48% surge in Asia NBV, 65% surge in Canada NBV and 110% increase in US NBV respectively.

Top-10 Shareholders

Top-10 shareholders in the company held around 23.34%% stake. The Vanguard Group, Inc. and RBC Global Asset Management Inc.  are among the largest shareholder in the company and carrying an outstanding position 3.09% and 2.98%, respectively. The institutional ownership in “MFC” stood at ~57.88%

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

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

Manulife is a market leader in both financial protection and wealth management holding a market leading position in Asia, Canada and the United States. The company always followed a prudent investment approach – avoiding complexity, setting limits, diversifying, and applying a healthy dose of skepticism in all their credit decisions. This philosophy continues to serve them well.

Moreover, amid heightening uncertainties over the global financial markets, liquidity is critical to all financial institutions. MFC is fully self-funded, implies their businesses generate enough cash flow to sustain their operations without being dependent on the commercial paper markets or other short-term funding arrangements. As on June 30, 2021, Manulife held CAD 254.6 billion in cash & cash equivalents and marketable securities.

Further, the company is having strong capital levels which is a  good measure of financial strength. Having a large capital base allows MFC to sustain strong credit ratings, and finance new opportunities.

Together with strong fundamental and solid balance sheet, the company is offering a lucrative dividend yield of 4.56%, significantly higher given the current lower interest rate environment.

Hence, based on the above rationale and valuation done, we recommend a “Buy” rating on the stock at the closing price of CAD 24.65 (as on October 08, 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

1-Year Price Chart (as on October 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on October 12, 2021, 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.