1 week Ago
gawrav Warren Buffett has said in the past that he is against using leverage to buy stocks. While that is good advice, what often gets ignored is that his insurance company, GEICO, a subsidiary of Berkshire Hathaway ( BRK.A )( BRK.
B ), enabled him to get a head start over simply using only ‘owned’ cash to invest. That’s because insurance companies carry a float, which is basically the unpaid premiums on policies, and so long as thresholds are met, it can be invested to generate extra earnings for the company and its shareholders. While this isn’t considered to be ‘leverage’ in the traditional sense, conceptually it works the same way, and that’s why insurance companies can be highly profitable if managed properly.
This brings me to Manulife Financial ( NYSE: MFC ), which I last covered in January, highlighting its strong growth, profitability and high capital returns to shareholders. The stock has done well for investors since my last piece, producing a 28% total return, far outpacing the 11% rise in the S&P 500 ( SPY ) over the same timeframe. In this article, I revisit MFC to discuss its recent business performance and highlight why the stock remains appealing for its dividend and total return potential, so let’s get started! MFC: Dividend Powerhouse With High Growth Potential Manulife Financial is a Canadian company that provides life insurance, annuities, and asset management solutions to individuals and institutional clients in Canada, U.
S., and Asia. MFC fits the bill of a productive ‘asset light’ financial company with low overhead costs, as it carries an appealing Core Return on Equity of 15.
7% . This is driven by a diversified asset mix comprised of lower yielding government bonds and cash as well as higher yielding mix of public equities, corporate bonds, and real estate. As noted below, 96% of MFC’s bond investments are investment grade and 71% are rated ‘A’ or better.
Investor Presentation Meanwhile, MFC continues to execute well with APE (annual premium equivalent) sales growing by 17% YoY during Q2 2024, led by strong growth in Canada and broad-based gains in Asia. Moreover, Core EPS grew by a robust 9% despite a higher effective tax rate due to GMT (global minimum taxes). Excluding GMT, Core EPS growth would have been 12%.
Importantly, MFC continues to transform its business into higher-potential segments, which includes Asia, Global WAM (wealth and asset management), and behavioral insurance. It’s seeing robust growth in those segments, with 40% core earnings growth in the Asia, driven by double-digit APE sales there and higher margins, and 24% core earnings growth in Global WAM, driven by 13% growth in assets under management. Also encouraging, MFC’s inroads into high-potential businesses have contributed to steady growth in book value per share.
As shown below, book value per share grew by 11% YoY and including CSM balance, adjusted book value grew by 15% YoY. For reference, CSM (Contractual Service Margin) represents unearned profits for a group of insurance contracts, and will emerge into earnings over the life of the insurance contract. Investor Presentation Looking ahead, management aims to increase the contribution of higher margin Asia, Global WAM, and behavioral insurance to 75% by 2025, while reducing lower margin and more volatile long-term care insurance and variable annuities business to 15% over the same time frame.
This could help MFC to achieve a company ROE target of 15% to 18% by 2027. This is supported by runway potential in Asia through an expanding middle class there and the need for retirement solutions particularly in Japan, Hong Kong, and mainland China. In particular, MFC’s discipline in digitization its operations and maintaining cost efficiencies could help it to achieve its medium-term targets.
Manulife maintains a strong balance sheet with an ‘A’ credit rating from S&P. This is supported by a low debt-to-capital ratio of 24.6% and a strong LICAT ratio of 139%, sitting comfortably above the 90% requirement set by Canadian regulators.
Importantly for investors, MFC plans to return $22 billion worth of capital to shareholders between now and 2027 through its focus on high-growth and high-cash generation businesses. This includes a combination of both dividends and share buybacks. MFC yields a respectable 4.
4% at present. Its dividend is well-covered by a 42% payout ratio and comes a 5-year CAGR of 8.9% and 10 years of consecutive growth.
MFC resumed share repurchases at the start of 2022, and as shown below, has reduced its share count by 8% over the past 2.5 years. MFC Shares Outstanding (Seeking Alpha) Lastly, I continue to find value in MFC at the current price of $27.
06 with a forward PE of 9.8. As shown below, this sits below its historical PE ratio of 10.
4 over the past 12 years. FAST Graphs While MFC is no longer cheap, it’s far from being expensive either. With a respectable 4.
4% yield, focus on higher-margin, higher-growth businesses, and share buybacks that represent a 10% earnings yield at the current valuation, MFC is well-positioned to deliver potentially strong total returns. This is based on the 4.4% dividend yield combined with a conservative base case estimate of mid-single digit EPS growth at a minimum.
Risks to MFC include potential for a broad-based economic downturn, particularly in China where it seeks to grow its business. Moreover, volatility in interest rates could result in changes to book value as it relates to MFC’s fixed income investments. Plus, regulatory changes and competition for business in the insurance and asset management segments could pressure forward growth as well.
Investor Takeaway Manulife Financial presents an attractive ‘asset light’ investment opportunity with its strong business performance, growing focus on higher-margin segments like Asia and Global Wealth & Asset Management, and high capital returns to shareholders. The company’s robust balance sheet, solid dividend yield of 4.4%, and share buyback program demonstrate its conservative and shareholder-friendly approach.
With a reasonable valuation, a respectable yield and potential for strong EPS growth for the aforementioned reasons, MFC could deliver potentially strong total returns for long-term investors. Read The Full Report on iREIT+Hoya iREIT+HOYA Capital is the premier income-focused investing service on Seeking Alpha. Our focus is on income-producing asset classes that offer the opportunity for sustainable portfolio income , diversification , and inflation hedging .
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Learn more . Analyst’s Disclosure: I/we have a beneficial long position in the shares of MFC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am not an investment advisor.
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