Will Manulife Come On on Top?

Manulife Financial Corporation is a leading international financial services company providing financial advisory, insurance, as well as wealth and asset management solutions to individuals, groups, and institutions. It is the largest Canadian life insurance company and second-largest in North America.

Manulife ranks amongst the top ten life insurers in the world by market capitalization value and has $1.2 trillion worth of assets under management. The company provides a suite of financial protection and wealth management solutions to meet the current and future needs of individuals and group customers. More than 80% of its assets comprise fixed income assets of which 98% is investment grade. Manulife’s 130-year long history and global franchises help its 30 million customers to make easier and better decisions. 

Manulife caters to customers in the USA, Canada, and Asia through a multi-channel distribution network of over 82,000 agents and thousands of distribution partners. Its operating segments are Asia (33% of 2019 core earnings), Canada (20%), US (30%), Global wealth and asset management (17%) and corporate and other. The company also owns reputed brands like Manulife and John Hancock in the USA.

• Opportunity Score: 68
• Ticker: TSE:mfc
• Sector: Financial Services
• Industry: Insurance - Life
• Market Cap: 43.49B
• P/E: 8.47
• Dividend Yield: 5.00%
• Payout Ratio (Earnings): 42.26%
• Canadian Dividend Aristocrat: YES
• Chowder Score: Members Only
• Revenue Growth: Members Only
• Dividend Growth: Members Only
• Dividend Growth Fit: 5/10
• Dividend Income Fit: 8/10

Revenue Growth & Market Exposure

With more than 125 years of experience, the company has developed strong customer relations and a deep understanding of their financial needs. Clients look to Manulife for its reliable, trustworthy and forward-thinking solutions. Given Manulife’s rich experience and long history, the company has developed client relations which are highly sticky in nature. The company offers unique product offerings for different markets it serves. Manulife continues its portfolio optimization to drive capital efficiency. Its strong focus on digitization and large scale should drive cost savings in the future. The company is adapting to the fast-growing digitization trends and it became the first insurer in Canada to underwrite using artificial intelligence. It is targeting future growth to come from Asia, as the Canadian market begins to mature. A balanced range of financial protection and wealth management solutions, wide geographic reach, a diversified distribution platform, and prudent risk management are Manulife’s key competitive advantages.

Manulife’s portfolio optimization resulted in better full-year 2019 financial results with a solid core RoE of 12.5%. The company released an additional $2.1 billion of capital and has successfully completed its 2022 target of releasing $5 million of capital, three years ahead of schedule. Manulife will continue to focus on both organic and inorganic initiatives to optimize its legacy portfolio. The core EBITDA margin in the Global Wealth and Asset Management business also increased as the company continues to build scale. Manulife makes significant investments in technology and infrastructure to support its future growth.

The company is focusing to grow its high potential businesses (Asia, Global WAM, group insurance in Canada) through the expansion of its distribution network, and product and service offerings and is estimating to generate two-thirds of its core earnings from these businesses by 2022. These businesses represented 57% of Manulife’s total core earnings in 2019 improving from 55% in the prior year.

Manulife continues to bag crucial financial agreements. It entered into a long-term strategic partnership with a leading online medical platform in mainland China and an asset management JV agreement with Mahindra Finance in India. It launched ManulifeMOVE in Vietnam and Cambodia and introduced the Manulife Vitality group insurance program in Canada. The company is focusing on driving customer engagement through the launch of innovative programs. It launched an end-to-end online insurance platform in collaboration with DBS Bank for the Singapore market.

Dividends

Manulife is a recent Canadian Dividend Aristocrat with an attractive dividend yield of ~7%. It has delivered annual dividend increases averaging at 11% CAGR per annum over the last five years. The company’s last annual dividend hike was 23% and it has a reasonable payout ratio of 40% currently. Manulife has returned over $900 million of capital to shareholders since the start of the NCIB and DRIP programs. The company has also decided to no longer issue shares from treasury at a discount in accordance with DRIP and will continue to purchase shares in the open market.

Manulife has a target to achieve 10%-12% EPS growth and a 30%-40% payout ratio over the medium term, which should help the company sustain its dividend growth in the future. A reasonable payout ratio also leaves enough room for future expansion. Technology initiatives and an attractive Asian market continue to be the future growth drivers for Manulife. The company is rapidly expanding into the Asian market and has entered into several agreements with various financial institutions, quickly becoming one of the preferred financial partners for Asian clients. Its wealth asset management is another big growth driver demonstrating a positive earnings trajectory and delivering steady asset expansion.

Manulife’s diverse businesses provide ample cash flow to sustain operations without the need of external funds. The company has compounded its EPS growth at a rate of 22% over the last decade. It has also delivered strong operating results during the same time. The company enjoys a sound capital position with increased financial flexibility. 

Manulife has achieved total expense savings of $700 million for the year and is on track to attain its target of $1 billion of expense efficiencies by 2022. Its expense initiatives like streamlining real estate footprint in the U.S. and Canada, voluntary exit and early retirement programs, and usage of automation and robotic solutions have already delivered significant benefits. The expense efficiency initiatives delivered bottom-line savings of $300 million in 2018 and reached $700 million in 2019. Manulife is estimating to deliver 10%-12% core EPS growth over the medium term.

Competition

Manulife competes with the likes of leading Canadian insurance companies such as Sun Life Financial, Great West Life, Industrial Alliance, and Intact Financial. The company operates in a highly competitive financial services market, comprising insurance, wealth and asset management industries. Manulife competes with both insurance and non-insurance financial services companies. Fintech and insurtech firms are also becoming an increasing threat to Manulife.

Bottom Line

As one of the largest insurers in Canada, Manulife is in a good position to benefit from its growing footprint in Asia supported by fast-growing markets and emerging middle class segments. Its diversified businesses have provided it the much needed immunity from fee compression and passive management. Manulife has been struggling for some years, but has steered the ship towards better waters, adjusting its strategies. In the current scenario, shares of Manulife have nose-dived as a result of the coronavirus outbreak and the company’s large exposure to Asian markets. Analysts believe that the company’s expansion in the Asian markets should result in double-digit growth for a few more years, once the situation normalizes.