High efficiency, wide margin of safety

Manulife Financial Corporation based in Canada (MFC) is an international financial services giant that helps individuals, businesses and institutions achieve their financial goals through its wealth, asset and insurance management businesses.

Manulife also offers annuity products and services. The company operates through its Manulife brand at its offices in Canada, Asia and Europe, and through its John Hancock brand in the United States. Manulife has approximately 120,000 agents and a multi-channel distribution network serving more than 30 million customers.

The shares trade on both the TSX (Toronto Stock Exchange) and the NYSE. The stock has been hovering between $10 and $20 for more than a decade on the US stock exchange. Although the shares did not rise significantly, the company made substantial developments including an increase in earnings and dividend during this period. Adding the notion that Manulife shares appear to be priced attractively, I remain bullish on the stock.

Latest financial statements

Manulife started fiscal 2022 on a high note. In its first-quarter results, the company reported base profit of $1.6 billion, down 4% from the year-ago period. Lower core earnings were the result of lower trading earnings, an unfavorable effect of seed capital investment markets and lower in-force earnings in US annuities. Nonetheless, the decline is entirely reasonable considering that last year’s results were somewhat inflated and fundraising more or less stalled in the current business environment.

In fact, although it has become increasingly difficult to attract capital of late, net retail inflows were $4 billion in the quarter. That compares to $6.5 billion last year, but it’s still a robust performance result, all things considered.

It should also be noted that management mentioned the Asia Retail segment, achieved higher gross inflows in Mainland China and Japan, in line with the company’s efforts to expand its operations in the East.

Despite weaker core earnings and lower cash inflows, net income was very strong. Specifically, net income was $3 billion, up $2.2 billion year-over-year. The massive increase was fueled by gains from the direct result of the markets. The increase seems quite significant and the company had reported losses in the market in the first quarter of last year. Overall, seeing market-related gains during a period when every portfolio is deep in the red is pretty impressive and highlights the company’s asset management capabilities.

In particular, market gains reflected the positive effect of reinvestment activity in fixed income securities, higher than expected returns on alternative long-dated assets, as well as favorable credit experience. Overall, I believe Manulife’s asset base is well positioned to take advantage of a rising rate environment.

All variables combined, core EPS (which excludes any one-time investment gains) for the first quarter was $0.77, down 6% year-over-year. Unlike in the past, the per-share metrics weren’t heavily impacted by buybacks, with the number of shares down just 0.15% from a year ago.

Dividend & Valuation

Manulife has increased its annual dividend per share consistently since 2014 in its local listing on the TSX. As a result, however, US-based investors were moderately impacted by currency effects (as evidenced by the somewhat variable dividends in the bar chart below). Yet they have on the whole benefited from an equivalent dividend growth.

Manulife’s latest DPS increase was 17.9%, from CAD 0.28 to CAD 0.33. However, I expect future dividend increases to be more moderate and converge to their seven-year average of around 8.8%. With the stock currently yielding nearly 5.8%, single-digit dividend increases should be more than enough to delight investors, in my view.

Consensus EPS estimates for fiscal 2022 point to $2.50 for fiscal 2022, suggesting a dividend payout ratio of approximately 41%. Thus, the company should have enough headroom for significant dividend increases in the future.

Based on the same EPS estimate, Manulife shares appear to be trading with a forward P/E close to 7.0, which I believe undervalues ​​the company somewhat. Looking ahead to the next twelve months, the multiple stands at 6.7, which is one of the lowest multiples Manulife has ever traded.

From another perspective, Manulife shares are currently trading at 0.8 times their book value. Going long on financial holdings, including insurers below book value, is generally seen as a smart move.

The Taking of Wall Street

On Wall Street, Manulife Financial has a Moderate Buy consensus rating based on four buys and eight blocks over the past three months. At $21.70, average projections for Manulife Financial shares suggest upside potential of 23.51%.


The performance of Manulife Financial shares over the years has likely discouraged some investors. However, the company’s underlying financials remain fairly sound, while the most recent results feature several notable highlights given the overall state of the market.

With the company actively raising the dividend, rate hikes accelerating of late, and the yield standing at 5.8%, dividend growth investors will likely find Manulife’s investment case very attractive. . In addition to the stocks trading below their book value, Manulife should also have a fairly large margin of safety.