Manulife Financial Corp. (MFC, Financial)(TSX:MFC, Financial) is one of the largest life insurers and asset managers in the world.
The company recently reported soft results attributed to the unexpected spread of Covid-19 in China and Hong Kong, which affected its operations. Annualized premium equivalent sales and core return on equity declined from the year-ago period.
The stock reacted badly and is down about 17% from last month. However, I feel this is an overreaction on transient issues and the company should recover.
A comparison of Manulife with its peers in the insusurance industry shows that it compares very well.
Ticker | Company | Current Price | Market Cap ($M) | Dividend Yield % | Debt-to -Equity | PE Ratio (TTM) | PB Ratio | EV-to- EBITDA | ROE % Adjusted to Book Value |
Manulife Financial Corp. | 22.43 | 33,619.70 | 5.44 | 0.23 | 4.81 | 0.88 | 3.16 | 19.10 | |
Sun Life Financial Inc. | 61.56 | 28,099.72 | 3.93 | 0.26 | 9.37 | 1.39 | 6.83 | 10.74 | |
Aflac Inc. | 55.09 | 35,487.02 | 2.65 | 0.26 | 9.05 | 1.20 | 7.46 | 10.53 | |
Prudential PLC | 10.06 | 34,540.71 | 1.33 | 0.41 | At Loss | 2.15 | 13.74 | -4.86 | |
Prudential Financial Inc. | 98.70 | 37,012.50 | 4.71 | 0.47 | 8 | 0.84 | 7.63 | 9.64 | |
Great-West Lifeco Inc. | 33.50 | 24,311.18 | 5.54 | 0.36 | 9.79 | 1.28 | 7.17 | 9.56 | |
MetLife Inc. | 62.05 | 50,459.43 | 3.13 | 0.32 | 8.04 | 0.94 | 7.90 | 10.89 | |
Dai-ichi Life Holdings Inc. | 2,484 | 19,966.79 | 3.34 | 0.18 | 5.53 | 0.52 | 0 | 19.40 | |
Power Corporation of Canada | 34.97 | 18,504.02 | 5.39 | 0.81 | 8.42 | 1.05 | 5.39 | 11.51 |
Insurance companies are tricky to evaluate as they make money by managing risk through long-term contracts. As such, earnings and cash flow can be quite variable from year to year. However, I find growth of book value to be a reasonable proxy to evaluate growth (as long as its done over a reasonably extended period of time). Manulife's long-term book value growth is quite decent given its size, clocking in at a just over 5% compound annual growth rate.
Business summary
Manulife Financial is a holding company. Through its subsidiaries, it is a life insurance company with four operating segments: Asia, which includes a range of health, protection, savings, medical, term and whole life products; Canada, which provides life, health, disability and specialty products, such as mortgage creditor and travel insurance; U.S., operating under the brand John Hancock, which provides a range of life insurance products, insurance-based wealth accumulation products and has an in-force long-term care insurance business and an in-force annuity business; and Global Wealth and Asset Management, which provides investment advice and solutions to retirement, retail and institutional clients.
While Canada is the company's smallest segment behind Asia and the U.S., Manulife is one of Canada's big three life insurance companies (the other two are Sun Life (SLF, Financial) and Great West Lifeco (TSX:GWO, Financial)). As of Dec. 31, the company reported assets under management or administration of about 1.4 trillion Canadian dollars ($1.09 trillion).
GuruFocus ranks Manulife as follows:
Ticker | Company | Current | GF Score | Market Cap | Financial | Profitability | GF Value | Growth | Momentum | Predictability Rank | Valuation | Quality | Probability of Financial |
Price | ($M) | Strength | Rank | Rank | Rank | Rank | Star | Rank | Rank | Distress (%) | |||
| MFC | Manulife Financial Corp. | 17.52 | 89 | 33668.63 | 6 | 7 | 6 | 9 | 9 | *** | 9 | 6 | 0.08 |
Segment Analysis
Revenue | Earnings before taxes | |||||
Report Date | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 |
Currency | CAD | CAD | CAD | CAD | CAD | CAD |
Scale | Thousands | Thousands | Thousands | Thousands | Thousands | Thousands |
Asia | 29,571,000 | 28,455,000 | 28,673,000 | 3,188,000 | 1,636,000 | 2,224,000 |
Canada | 12,366,000 | 18,638,000 | 19,609,000 | 1,791,000 | 390,000 | 980,000 |
U.S. | 13,256,000 | 23,361,000 | 24,594,000 | 2,483,000 | 1,565,000 | 1,688,000 |
Global Wealth & Asset Management (WAM) | 6,541,000 | 5,749,000 | 5,595,000 | 1,641,000 | 1,272,000 | 1,144,000 |
Total | 61,734,000 | 76,203,000 | 78,471,000 | 9,103,000 | 4,863,000 | 6,036,000 |
Geographic analysis
Revenues
Report Date | 12/31/2021 |
Currency | CAD |
Scale | Thousands |
Asia | 29,571,000 |
Canada | 12,366,000 |
U.S. | 13,256,000 |
Other | 6,541,000 |
Total | 61,734,000 |
Source: Mergent
Valuation
I used the Gurufocus DCF Calculator to estimate the fair value of Manulife stock. Using conservative parameters and a combination of estimated normalized earnings per share and long-term book value growth rate, I conclude that Manulife has a wide margin of safety.
For earnings per share, I used the value from the 10-year trendline and assumed a 5% growth rate (from the long-term book value growth rate, which was shown above).
Note the company's tangible book value is CA$20.52, which is not much below the stock price.
One more thing to note is that the Piotroski F-Score is very solid at 9 out of 9. The discrete score ranges between zero and nine based on a set of criteria used to determine the strength of a company's financial position. The Piotroski F-Score is used to determine the best value stocks, with nine being the best and zero being the worst. While I cannot say that the score has any predictive power, it does tell me the company is in good shape.
The problem with all insurance companies is that most ordinary investors don't know what may be lurking in the depths of their huge balance sheet. During the financial crisis, many investors (including me) found out too late that AIG (AIG, Financial) was insuring credit default on derivatives of subprime mortgages, which blew up and almost took the company down with it. Similarly, Manulife itself was overly exposed to the equity markets during the financial crisis of 2008-09 as it had sold a huge amount of equity-linked variable annuities with guarantees backed by equity market returns. When the markets crashed, regulators forced Manulife to shore up these annuities, with reserves wiping out a huge chunk of equity in 2010. This forced the company to issue more equity, which diluted shareholders. The company has recovered quite well since then and, hopefully, has learned a lesson.
Conclusion
With a 5.4% dividend and long-term mid-single-digit book value growth, Manulife looks like a good place to hide in this turbulent market. The company is geographically well diversified across North America and Asia. Rising interest rates should help the insurance float generate more income and should help the share price in the years ahead. The company has definitely made a lot of improvements over the last several years, as we can see in the return on tangible equity chart. ROTE has now reached over 15% and the improvements should continue. This should lead to a re-rating of the stock as multiples expand.
