There’s no question, financial stocks are in the dirt right now. With the ultra-low interest rate environment we’re in, stocks in the insurance and financial sector like Manulife Financial (TSE:MFC) are struggling. Many investors new to buying stocks may not understand that financial stocks are heavily dependent on high interest rates to generate revenue.
So, how do we look at this?
Is this a golden opportunity for Canadian investors to grab these Canadian dividend stocks at a ridiculous discount, or will low interest rates effect these financial companies for the foreseeable future.
More importantly, is Manulife’s dividend safe, or should investors be prepared for a dividend cut?
Without further ado, lets take a look.
Manulife Financial (TSE:MFC) dividend and stock analysis
Manulife Financial is a leading Canadian provider of life insurance and wealth management products. The company provides these services to both individuals and group customers in Canada, the United States, and Asia.
In terms of investments, the company offers things like mutual funds, ETFs, closed-ended funds, target-date funds, annuities, and college savings plans.
In terms of insurance, they provide a wide variety of health, travel, and life insurance.
Along with Sunlife Financial and Great West Life, Manulife forms what is known as the “Big Three” insurance companies here in Canada, and has over $1.2 trillion in assets under management. In 2019, the company reported core earnings of $6 billion.
So, how are core earnings expected to move in 2020, and how safe is Manulife’s dividend?
Manulife’s share price has taken a dive, and as such it’s dividend is quite lucrative right now, yielding 6.06% at the time of writing.
On a trailing twelve month basis this represents around 54% of earnings, which indicates a dividend that is well covered by earnings. It’s important to keep in mind that these trailing earnings now have 2 quarters of COVID implications, so the payout ratio in terms of earnings is a little more accurate.
In terms of free cash flows, the company is paying out only 11% towards the dividend.
If we look towards dividend growth, Manulife currently has a dividend growth streak of 6 years. The company became a Canadian Dividend Aristocrat 1 year ago, and has a 5 year annual dividend growth rate of 12%. It’s most recent increase of 9.9% falls just shy of this, however I’m more than happy with a near double digit increase.
The issue we will see moving forward is the Federal Government limiting major financial and insurance companies from raising the dividend. Manulife’s 6 year growth streak will probably be reset to 0. The company will remain a Dividend Aristocrat for another year because it will more than likely maintain its dividend, but COVID-19 will put a stop to growth.
To be honest, a maintained dividend in this environment is a great thing. We need to have a glass half full attitude towards this, because financial and insurance companies here in Canada could have easily rolled out dividend cuts to preserve liquidity.
Thankfully, they are capitalized well enough that the dividends should remain in tact, and I’d expect them to start growing dividends again in 2021.
Compared to the other insurance companies, Manulife currently offers the 2nd best yield, with Great West Life offered in the 6.3% range.
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Manulife performance and valuation
Throughout the course of the pandemic, when we compare Manulife to the other 2 major insurance companies here in Canada, it has been the worst performing by a landslide.
Market Cap: $36.48 billion
Forward P/E: 7.06
Dividend Growth Streak: 6 years
Payout Ratio (Earnings): 40.29%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 9.90%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
Still down nearly 27% year to date, the stock is underperforming the TSX Index by over 2100 basis points. In fact, the only major insurance company that’s keeping up with the index is Sunlife Financial.
But, it’s fairly important to understand how impactful the COVID-19 pandemic was on insurance companies. We went from a rising interest rate environment, which bodes well for these types of stocks, to an ultra-low environment.
As interest rates go lower, financials, particularly insurance companies, struggle. Their products like say an annuity become less attractive, as they offer lower interest rates and instead investors flock to different types of securities, like dividend stocks for example.
Prior to COVID-19, Manulife had dividend adjusted returns of 36.5% over the last 4 and a half years (Oct 2015 to Jan 2020). This outperformed both Great West Life (18.8%) and the TSX Index (25.9%).
It’s fairly important to understand however, that we aren’t expected to return to that type of environment for some time now. If you’re purchasing a stock like Manulife, you have to exercise extensive patience.
It’s exciting when we see a blue-chip stock like this trading 27% off highs. But, there’s a fundamental reason for this. The company has seen it’s net income drop from $3.6 billion through 3 quarters in 2019 to $2.02 billion in 2020.
This is a significant decrease, and the company has seen its new business value and sales shrink in every one of its Asian, Canadian, and United States markets.
In terms of valuation, as you can see by the chart above Manulife Financial hasn’t traded even relatively close to this cheap on a price to earnings basis over the last 5 years. Again, I point to the changing interest rate environment as strong catalyst.
However, if we look to valuations of Sunlife and Great West Life, Manulife is definitely a bargain right now. I like to use the price to earnings in relation to others in its industry, or based on historical numbers. Both of which Manulife passes the test on.
However, it’s important we understand that one of the most important ways to valuate an insurance company is to look at the price to book ratio.
For an insurance company its price to book ratio is a solid measure of the health of its balance sheet, which for most contains stocks, bonds, and other securities that they invest premiums in. The book value of a company is simply its shareholders equity, and indicates a firm’s value if it were to be completely liquidated.
We want to see an insurance company trade near or under book value, whereas valuations getting closer to 2 may indicate the stock is getting pricey.
Manulife is currently trading well below Sunlife and Great West Life in terms of price to book value at 1.10.
Overall, Manulife is a strong option, but it’s recovery will not be quick
If you’re looking to take a position in Manulife today, it’s important that you understand it may take several years for this stock to come back to 2020 highs.
Interest rates are not expected to go anywhere in the near future, with COVID-19 wreaking havoc on the economy, Canadians unable to pay their bills and unemployment still sitting at uncomfortable levels.
The Bank of Canada will keep interest rates low, and as a result Manulife’s products will be less desirable than they once were. However, I have faith the company will be able to maintain its current dividend, and even continue to grow it in 2021, as it does have strong exposure to the Asian and United States markets, where I’d expect growth to be faster.