Company Profile

Manulife Financial Corporation (TSX: MFC) is a leading international financial services group that helps people make their decisions easier and lives better. With its global headquarter in Toronto, Canada, the group operate as Manulife across Canada, Asia, and Europe, and as John Hancock in the United States. It provides financial advice, insurance, and wealth and asset management solutions to individuals, groups and institutions. At the end of 2019, the company had more than 35,000 employees, over 98,000 agents, and thousands of distribution partners, serving almost 30 million customers.

Investment Rationale

• An Income Play with Consistent Dividend Payment History: Amid challenging time, where the economic outlook for most of the industries are in doldrum and companies have announced a series of measures to preserve liquidity including dividend cut, the board of MFC has declared a quarterly dividend of CAD 0.28/share on May 06, 2020; this shows the strong financial health of the business. Further, when there is a lot of cheap money coming from the central banks, one cannot find a yield income as money supply has soared up. Amid the low interest rate environment, MFC shares are offering a lucrative dividend yield of 5.85%, which is significantly higher compared to the Canada 10 Year Benchmark Bond Yield of  53%, and also MFC’s dividend yield is approximately 1.6 times of the TSX 300 Composite Index dividend yield.

• Ample Liquidity: In today’s changing economic climate, liquidity is critical to all financial institutions. Manulife is fully self-funded, meaning the company generate enough cash flow to sustain their operations without being dependent on the commercial paper markets or other short-term funding arrangements. Manulife maintains a high level of liquidity and has consistently retained a high level of cash and high-grade short-term assets, which totalled to CAD 27.1 billion as of March 31, 2020.

• Strong Capital Levels with Solid Ratings: Strong capital levels are also a good measure of financial strength. Having a large capital base enables the company to sustain strong credit ratings, finance new opportunities, and most importantly, maintain their commitments to our policyholders. The group’s Life Insurance Capital Adequacy Test ratio at the end of Q1FY20 stood at 155%, well above the supervisory target of 100%. The group has been assigned solid ratings with a stable outlook from five rating agencies – A.M. Best (A+), DBRS (AA), Fitch (AA-), Moody’s (A1) and S&P (AA-).

• MFC Shares Trading above the Crucial Short-term Support Levels: Over the last three months shares of MFC recorded a reversal trend on the daily price chart; however, its shares still trading below its long-term 200-day daily moving average, but short term price trend is positive in the script. At the last traded price of CAD 19.14 (July 17, 2020 market close), shares of MFC traded above the 30-day and 50-day crucial short-term support levels and were trending towards its long-term support level of 200-day SMA of CAD 21.76. Further, its shares traded above 5-day, 10-day and 20-day DMA as well, which implies a positive price trend in the stock.
• A Golden Cross-over Appeared on the Daily Price Chart: On July 16, 2020, a golden crossover appeared on the daily price chart of the MFC, where the 50-day DMA crossed over 100-day DMA. The golden cross is a technical chart pattern indicating the potential for a major rally. The golden cross appears on a chart when a stock's short-term moving average crosses above its long-term moving average. Therefore, a potential rally is expected in the MFC shares.

Source: Refinitiv, Thomson Reuters

• Risk Associated to Investment: The company is primarily exposed to the Equity Market and Interest Rate risks; however, the companies interest rate and equity market sensitivities have decreased significantly since 2009 with the implementation of robust hedging program. Though, steep volatility like February and March, this year would further dent the financial performance. Further, Covid-19 pandemic continues to disrupt economies and capital markets worldwide, the second wave of the outbreak could have significant weigh on the group's performance.

Financial Highlights: Q1FY20

During the first quarter under consideration, the group’s reported net income attributed to shareholders stood at ~  CAD 1.3 billion, slumped ~40.4% against the same quarter of the previous financial year, primarily driven by a decline in core earnings of CAD 0.5 billion and charges from investment-related experience and the direct impact of equity markets and variable annuity guarantee liabilities as compared to gains in the same period of the previous financial year. This was partially offset by gains from the direct impact of interest rates driven by widening corporate spreads as compared to losses in the previous corresponding period.

Reported core earnings of the company during the first quarter of 2020 stood at CAD 1.0 billion, a decline of 34% on a YoY basis driven by the unfavourable impact of markets on seed money investments in new segregated funds and mutual funds. Further, the absence of core investment gains in the quarter along with lower new business volumes in Japan and unfavourable Q120 policyholder experience in North America, including unfavourable travel claims related to COVID-19 took a toll on the earnings. These items were partially offset by the impact of in-force business growth in Asia and higher fee income from higher average assets under management and administration levels in Global Wealth and Asset Management business.

During the quarter under consideration, New Business Value shrunk by 11% to CAD 469 million, mainly driven by 14% slump in Asia’s NBV as growth in Hong Kong and Asia was more than offset by a decline in Japan. In Canada, NBV surged by 24% on a YoY basis driven by higher sales across all business lines. United States' NBV slumped by 23% primarily due to the impact of lower sales volumes and a less favourable business mix.

Annualized premium equivalent (APE) sales slumped by 9% to CAD 1.6 billion on a YoY basis, driven by 20% sales decline in Asia. The United States APE sales declined by 3%, while Canada’s APE sales surged by 44%.

The net inflow from Global Wealth and Asset Management reported at CAD 3.2 billion in the quarter under consideration as compared to a net outflow of CAD 1.3 billion in a year-over period. Net inflows in Asia stood at CAD 0.6 billion in 1Q20, in line with 1Q19, as higher net inflows in retirement were offset by higher redemptions, mainly in institutional asset management. Net inflows in Canada were CAD 2.8 billion in 1Q20 compared to net inflows of CAD 2.1 billion in 1Q19, driven by higher gross flows into institutional asset management equity mandates. This was partially offset by lower net inflows in retirement from lower new plan sales and higher redemptions. Net outflows in the U.S. were CAD 0.2 billion compared to net outflows of CAD 4.0 billion in 1Q19. The improvement was driven by higher retail gross flows, primarily from strong institutional model allocations and intermediary sales, as well as the sale of a large-case retirement plan of CAD 2.6 billion. This was partially offset by the redemption of several retirement plans and retail redemptions amid equity market declines in March.

At the end of the Q1FY20, the group’s leverage ratio stood at 23%, declined by 2.1 percentage points from December 31, 2019

Stock Performance

At the closing (on July 17, 2020), shares of MFC traded 0.16% lower at CAD 19.14. In a year-over period, its shares have tested a 52W high price of CAD 27.78 on January 20, 2020, and a 52W low price of CAD 12.58 on March 18, 2020. At the last closing price, MFC shares have recovered approximately 53% from its 52W low price level and traded approximately 28% below its 52W high price level. This reflects a sharp recovery in the script in a short time span, and at the last traded level, the stock was more tilted towards its 52W High price level.

1-Year Price Performance (July 17, 2020, after the market close). Source: Refinitiv (Thomson Reuters).

Over the past three months, its shares have delivered a price return of ~ 10.3% and up by ~ 3% in a month over period. However, on a Y-o-Y basis, its shares were featuring a negative price return of 20.35% and traded 28% lower on a YTD basis.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, together hold around 21.62% stake in the company. RBC Global Asset Management Inc. and The Vanguard Group, Inc. holds the maximum interests in the company at 3.59% and 3.10%, respectively. Further, seven out of top-10 shareholders have increased their stake in the company, with RBC Wealth Management, International and TD Asset Management Inc are among the top investors that have increased their stakes by 9.04 million and 7.97 million, respectively. The institutional ownership in the MFC stood at 53.29%, and ownership of the strategic entities stood at 0.02%, respectively.

Source: Refinitiv (Thomson Reuters)

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

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

Stock Recommendation

Manulife has market-leading positions in Asia, Canada, and the United States. The company's diverse international operations allow them to leverage its people, products, technology, and expertise across markets while helping provide natural hedges that ensure the group's risks and opportunities are effectively diversified. Further, the company has strong and well-diversified digital and in-person distribution platform, which includes independent advisors, contracted agents, financial planners, brokers, broker-dealers, and other distribution partners. This enables the group to meet the varying needs of the international base of customers, regardless of their chosen distribution channel.

Moreover, the company has a high quality, diversified investment portfolio. Their invested assets totalled CAD 405.3 billion as of March 31, 2020 and included a variety of asset classes that are highly diversified by geography and sector. This diversification has historically produced superior returns while reducing overall portfolio risk. Around 85% of the group's investment portfolio consists of fixed income assets, out of which ~98% is investment grade.

Further, the group is an income investor-friendly company and is consistent in the dividend payment. At the last traded price, its shares were offering a dividend yield of 5.85%, which is exceptionally higher amid a lower interest rate environment and a lucrative bet from an income investor's standpoint.

Moreover, an On July 16th, 2020, a golden crossover appeared on the daily price chart of the MFC, indicating a potential for a major rally from the current trading level.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Buy" recommendation at the closing price of CAD 19.14 (July 17, 2020), with lower double-digit upside potential based on the NTM Peer's Average Price-to-Book Value Per Share of 0.85x, on the FY20E Book Value Per Share. We have considered Sun Life Financial Inc, Power Corporation of Canada and Prudential Financial Inc etc., as a peer group for the comparison purpose.

*Recommendation is valid at July 20, 2020 price as well

* Please be aware that dividends are variable and not guaranteed.

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Disclaimer

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