Manulife: A 5.2% Yielding Blue Chip Too Cheap To Ignore – Seeking Alpha
Riddy/iStock via Getty Images
This article was coproduced with Dividend Sensei.
The correction of 2022 is now 65 days old and could potentially last another eight to 10 weeks, according to Morgan Stanley and JPMorgan.
Why?
Well, there are many bricks in Wall Street’s wall of worry, but one of the biggest is inflation.
Thanks to the supply chain disruptions of the pandemic, combined with record excess savings from trillions in stimulus and a booming economy, inflation has soared to 7.9%.
Even excluding volatile food and fuel costs, core inflation is 6.4%. And thanks to soaring energy prices, largely a result of Russia’s invasion of Ukraine, Goldman Sachs thinks inflation could get a bit worse in the next month.
Goldman estimates that we could see about 8.5% inflation in March, and in a worst-case scenario of $200 crude, about 10.5% in the coming months.
But guess what?
High inflation tends to cause rising interest rates and that’s a boon to financial blue chips like Manulife Financial (MFC).
In fact, value tends to do best relative to growth when rates are rising, and you can see that from MFC’s 4% gains this year, which are 20% better than the Nasdaq.
Today I want to share with you the three reasons why Manulife is one of the best high-yield blue chips you can safely buy in these troubled times.
Not only does it offer a very safe 5.2% yield today, but it could help you retire in safety and splendor in the coming years and decades.
In fact, MFC is an anti-bubble Buffett-style “fat pitch” that analysts expect to deliver 32% total returns in the next year and potentially triple over the next half-decade.
Or to put it another way, Manulife Financial is a 5.2% yielding blue-chip set to soar and too cheap to ignore.
Reason One: One Of The World’s Highest Quality Companies
The Dividend Kings’ overall quality scores are based on a 238-point model that includes:
dividend safety
balance sheet strength
credit ratings
credit default swap medium-term bankruptcy risk data
short and long-term bankruptcy risk
accounting and corporate fraud risk
profitability and business model
growth consensus estimates
historical earnings growth rates
historical cash flow growth rates
historical dividend growth rates
historical sales growth rates
cost of capital
long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters’/Refinitiv and Just Capital
management quality
dividend friendly corporate culture/income dependability
long-term total returns (a Ben Graham sign of quality)
analyst consensus long-term return potential
It actually includes more than 1,000 metrics if you count everything factored in by 12 rating agencies we use to assess fundamental risk.
How do we know that our safety and quality model works well?
During the two worst recessions in 75 years, our safety model predicted 87% of blue-chip dividend cuts during the ultimate baptism by fire for any dividend safety model.
How does MFC score on one of the world’s most comprehensive safety models?
MFC Dividend Safety
Rating
Dividend Kings Safety Score (147 Point Safety Model)
Approximate Dividend Cut Risk (Average Recession)
Approximate Dividend Cut Risk In Pandemic Level Recession
1 – unsafe
0% to 20%
over 4%
16+%
2- below average
21% to 40%
over 2%
8% to 16%
3 – average
41% to 60%
2%
4% to 8%
4 – safe
61% to 80%
1%
2% to 4%
5- very safe
81% to 100%
0.5%
1% to 2%
MFC
91%
0.5%
1.5%
Risk Rating
Low Risk (84th industry percentile consensus)
A stable outlook credit rating 0.66% 30-year bankruptcy risk
15% OR LESS Max Risk Cap Recommendation
Long-Term Dependability
Company
DK Long-Term Dependability Score
Interpretation
Points
Non-Dependable Companies
21% or below
Poor Dependability
1
Low Dependability Companies
22% to 60%
Below-Average Dependability
2
S&P 500/Industry Average
61% (58% to 70% range)
Average Dependability
3
Above-Average
71% to 80%
Very Dependable
4
Very Good
81% or higher
Exceptional Dependability
5
MFC
85%
Exceptional Dependability
5
Overall Quality
MFC
Final Score
Rating
Safety
91%
5/5 very safe
Business Model
80%
2/3 above-average
Dependability
85%
5/5 exceptional
Total
88%
12/13 Super SWAN
Risk Rating
3/3 Low Risk
15% OR LESS Max Risk Cap Rec
10% Margin of Safety For A Potentially Good Buy
MFC: The 81st Highest Quality Master List Company (Out of 509) = 84th Percentile
The DK 500 Master List includes the world’s highest quality companies including:
All dividend champions
All dividend aristocrats
All dividend kings
All global aristocrats (such as BTI, ENB, and NVS)
All 13/13 Ultra Swans (as close to perfect quality as exists on Wall Street)
47 of the world’s best growth stocks (on its way to 100)
MFC’s 88% quality score means its similar in quality to such blue-chips as
Nordson (NDSN) – dividend king
Pepsi (PEP) – dividend king
Altria (MO) – dividend king
Kimberly-Clark (KMB) – dividend king
Ecolab (ECL) – dividend aristocrat
Caterpillar (CAT) – dividend aristocrat
A.O Smith (AOS) – dividend aristocrat
McCormick (MKC) – dividend aristocrat
Even among the most elite companies on earth, MFC is higher quality than 84% of them.
Why?
Manulife was founded in 1999 in Toronto, Canada.
Manulife provides life insurance and wealth management products and services to individuals and group customers in Canada, the United States, and Asia.
Manulife is one of Canada’s Big Three Life Insurance companies (the other two are Sun Life and Great-West Life). As of Dec. 31, 2020, Manulife reported assets under management or administration of about CAD $1.3 trillion.” – Morningstar
It’s the third-largest insurance company in Canada and the seventh-largest publicly-traded insurance company on earth.
But it’s also highly diversified globally.
Investment Thesis: Improving Profitability Fueling Industry-Leading Growth
“Manulife, along with Sun Life and Great-West Life, are the Big Three Canadian life insurers. While Manulife has attempted to reposition itself from the global financial crisis, it is still arguably the worst position of the three as it generally has the lowest returns on equity.
Not only does Manulife pay out the highest percentage of benefits to premiums, but the firm’s asset-management operations don’t generate the pretax margins that Sun Life’s does, while Great-West has a larger retirement record-keeping business via Empower.” – Morningstar
MFC’s growth prospects are the best of the CA big three thanks to its margins having the most room for expansion.
In other words, just like Home Depot (HD) has superior profitability to Lowe’s (LOW) for many years, it’s the ability to boost margins that can deliver superior long-term growth and potentially life-changing long-term returns.
“Asia has been a big focus for Manulife and currently generates around 30% of the firm’s profit. Manulife’s Asia business stretches across the continent as the firm provides insurance and wealth products in Japan, Hong Kong, Singapore, mainland China, and Southeast Asian countries. In addition, Manulife recently entered into a joint venture to provide asset and wealth management solutions in India.” – Morningstar
MFC is investing heavily in Asia, which it sees as the best long-term growth runway in the insurance industry.
“In the fourth quarter, we announced a dividend increase of $0.05 per share resulting in a total quarterly common shareholder dividend of $0.33 per share or an 18% increase. This increase resumed our track record of sustained gradual dividend increases which remains one of our top capital deployment priorities. We also recently launched a Normal Course Issuer Bid to repurchase up to 5% of outstanding common shares.” – CEO, Q4 conference call (emphasis added)
MFC plans to increase the dividend every year going forward and buying back more stock than it historically has.
“On a cumulative basis, we freed up $6.3 billion of capital through various efforts across multiple legacy blocks. And our commitment and focus on optimizing our long-term care and variable annuity businesses are as strong as ever. And we aim to achieve our 2025 supplemental goal of reducing core earnings contributions from these businesses for less than 15% of total core earnings and would like to see this decline further to less than 10% with inorganic actions…
I’m pleased to report that in 2021, we reduced the core earnings contribution from our long-term care and variable annuity businesses to 20%, supported by the increasing contributions from our highest potential businesses. In addition, we entered into an agreement in the fourth quarter to reinsure a significant portion of our legacy US Variable Annuity Block with Venerable Holdings, Inc. ” – CEO, Q4 conference call
Legacy businesses like long-term care (nursing homes) and annuities have bedeviled insurance companies for the last decade. MFC is working on getting those policies down to less than 10% of its business over time.
“I’m pleased to confirm the transaction closed on February 1st and is expected to result in approximately $2 billion of capital released in 2022. This transaction positions us well to achieve our 2025 supplemental goal…
We plan to deploy a significant portion of the capital release to buy back common shares to neutralize the impact of the transaction on core EPS. We remain committed to optimizing our legacy portfolio especially LTC and VA and we’ll continue to seek opportunities to reduce risk and unlock value.” – CEO, Q4 conference call
MFC is executing well on that plan to become a more profitable and financially flexible company in the future.
MFC has a good market share in a highly fragmented global industry.
#1 in Canadian retirement plans
#2 in Canadian group benefit plans
#3 in Canadian insurance
10th largest bank in Canada
#1 in Hong Kong retirement plans
#1 in Vietnam insurance
#2 in Singapore insurance
#5 in HK insurance
#8 in Indonesian insurance
#8 in Malaysian insurance
#9 in US insurance
MFC just signed a 16-year deal with one of Vietnam’s largest banks and acquired a Vietnam insurance company.
Why?
Vietnam’s economy has grown at 9% annually over the last decade (one of the fastest-growing economies on earth)
just 1.6% insurance generation (long growth runway)
Manulife’s Vietnam policies have been growing at 27% CAGR over the last five years
its estimated Vietnam new business value has been growing at 51% CAGR
This is just one example of how MFC is able to deliver some of the best growth rates in the insurance industry.
Management thinks it can grow at 10% to 12% over time while delivering safe dividends via a 30% to 40% payout ratio (50% is safe according to rating agencies).
Conservative Investment Strategies Retirees Can Trust
MFC’s $333 billion investment portfolio is 83% invested in bonds, 97% of which are investment grade.
7% stocks
10% alternatives like real estate, infrastructure, private equity, and timberland and farmland
15% of MFC’s bond portfolio (13% of its portfolio) is AAA-rated sovereign debt
72% is A-rated bonds (59% of its portfolio)
75% of its portfolio is investing in Canada and the US, and another 9% in Japan and Europe.
Its securities debt is 72% AAA, and 92% A-rated or better.
Not a single corporate bond is more than 1% of its portfolio, and it has exposure to every sector.
Its high quality commercial real estate portfolio is diversified globally
42% US
42% Canada
14% Asia
2% Australia and other
MFC owns $11.25 billion in commercial real estate in some of the world’s most important financial centers.
Toronto
LA
San Diego
Boston
Singapore
Vancouver
San Francisco
Hong Kong
Chicago
Washington
New York
Melbourne
Atlanta
Tokyo
Bottom Line: Manulife Is A 5.2% Yield Retirees Can Trust
In fact, no less than Warren Buffett think another financial crisis is all but impossible.
The banks will not get this country in trouble, I guarantee it” – Warren Buffett
New financial regulations post-Great Recession were so strict that even in 2013 Buffett assured the world that another crisis was very unlikely.
MFC Credit Ratings: Very Little Fundamental Risk
Rating Agency
Credit Rating
30-Year Default/Bankruptcy Risk
Chance of Losing 100% Of Your Investment 1 In
S&P
A stable
0.66%
151.5
Fitch
A stable
0.66%
151.5
DBRS
A+ stable
0.60%
166.7
AmBest
A-
2.50%
40.0
Consensus
A stable
1.11%
90.5
(Source: S&P, Fitch, DBRS, AMBest)
MFC’s balance sheet and risk-management look nothing like the company that had to cut its dividend twice during the Great Recession.
And MFC’s subsidiary financial strength ratings are even more impressive.
AM Best: A+ (2nd place out of 13 peers)
DBRS/Morningstar AA (3rd place out of 22 peers)
Fitch AA- (4th place out of 21 peers)
Moody’s A+ (5th place out of 21 peers)
S&P AA- (4th place out of 21 peers)
No less than four credit rating agencies estimate an approximate 1% risk of losing all your money buying this company today.
MFC’s capital reserves are 41% above regulatory minimums.
How do MFC’s credit ratings compare to its two largest peers?
Sun Life Credit Ratings
Rating Agency
Credit Rating
30-Year Default/Bankruptcy Risk
Chance of Losing 100% Of Your Investment 1 In
S&P
A+ stable
0.60%
166.7
DBRS
A+ stable
0.60%
166.7
AmBest
A
0.66%
151.5
Consensus
A stable
0.62%
161.3
(Source: S&P, DBRS, AMBest)
Great-West Credit Ratings
Rating Agency
Credit Rating
30-Year Default/Bankruptcy Risk
Chance of Losing 100% Of Your Investment 1 In
S&P
A+ stable
0.60%
166.7
Fitch
A+ Negative Outlook
0.60%
166.7
DBRS
A+ stable
0.60%
166.7
AmBest
A
0.66%
151.5
Consensus
A stable
0.62%
162.6
(Source: S&P, Fitch, DBRS, AMBest)
MFC’s credit ratings are not quite as good as SLF and GWO’s but rating agencies agree it’s a low-risk balance sheet and with a fundamentally very low risk of default and bankruptcy.
Like with Canadian banks, even the lower quality Canadian insurance company is still one of the world’s safest companies.
MFC Bond Profile
$1.7 billion in liquidity
well-staggered debt maturities (little problem refinancing maturing bonds)
bond investors are so confident in MFC’s new safer business model that they are willing to lend to it for 20 years at 4.1%.
Profitability: Wall Street’s Favorite Quality Proxy
MFC’s profitability has been improving in recent years, as management’s cost-cutting efforts take hold.
MFC”s profitability is relatively stable over the last decade and its free cash flow margins are now nearly 40%.
MFC Profit Margin Consensus Forecast
Year
EBIT (Operating) Margin
Net Margin
2020
7.0%
7.0%
2021
10.6%
10.6%
2022
9.6%
8.9%
2023
11.1%
10.1%
2024
15.1%
12.0%
Annualized Growth
21.20%
14.51%
(Source: FactSet Research Terminal)
MFC’s profitability is expected to significantly improve in the coming years, though some of this is due to the expected short-term decrease in sales.
MFC Dividend Growth Consensus Forecast
Year
Dividend Consensus
EPS/Share Consensus
Payout Ratio
Retained (Post-Dividend) Earnings
Buyback Potential
2021
$0.92
$2.57
35.8%
$3,206
8.36%
2022
$1.03
$2.79
36.9%
$3,420
8.92%
2023
$1.11
$3.00
37.0%
$3,672
9.58%
2024
$1.13
$3.30
34.2%
$4,216
11.00%
Total 2021 Through 2024
$4.19
$11.66
35.9%
$14,514.21
37.85%
Annualized Rate
7.09%
8.69%
-1.47%
9.56%
9.56%
(Source: FactSet Research Terminal)
Rating agencies consider a 50% payout ratio safe for this industry.
MFC is expected to average 36% and allow it to retain $14.5 billion in post-dividend earnings over the next few years.
That’s potentially enough to buy back almost 40% of its shares at current valuations.
MFC isn’t known for aggressive buybacks though it just authorized a 5% buyback program to take advantage of its low valuation.
Basically, MFC offers high-yield income investors everything they could want.
a generous and safe yield
that grows every year including during the worst recession in 75 years
a fortress balance sheet confirmed by no less than five credit rating agencies
But MFC’s 5.2% yield is just the starting point for its incredible long-term investment proposition.
Reason Two: Some Of The Best Growth Prospects In The Industry
MFC has some impressive growth levers to pull, and analysts are optimistic about its medium-term and long-term growth prospects.
MFC Medium-Term Growth Consensus Forecast
Year
Sales
EBIT (Operating Income)
Net Income
2020
$62,211
$4,349
$4,349
2021
$48,845
$5,164
$5,164
2022
$59,517
$5,687
$5,292
2023
$55,938
$6,191
$5,642
2024
$49,142
$7,413
$5,906
Annualized Growth
-5.73%
14.26%
7.95%
(Source: FactSet Research Terminal)
MFC’s efficiency efforts are expected to overcome the medium-term sales headwinds analysts expect.
Metric
2020 Growth Consensus
2021 Growth Consensus
2022 Growth Consensus
2023 Growth Consensus (Bond Market Recession Forecast)
2024 Growth Consensus
Sales
0%
-19%
28%
-6%
-12%
Dividend (Local Currency)
12%
5%
14% (official)
7%
2%
EPS
-3%
18%
9%
9%
9%
Operating Cash Flow
-3%
23%
NA
NA
NA
Book Value
8%
7%
10%
7%
19%
(Source: FAST Graphs, FactSet Research Terminal)
While revenue can be volatile in this industry what matters is that MFC is expected to deliver very consistent earnings and book value growth, as well as dividend increases every single year.
And here’s the reason Dividend Sensei just recommended MFC for DK members and added it to the DK correction watchlist.
MFC Long-Term Growth Outlook
8% to 13% growth consensus range
13% median growth estimate from all 16 analysts
10% to 12% management guidance
Coming out of the financial crisis MFC suffered many years of disappointing earnings growth, missing expectations until it began modestly beating expectations started in 2017.
smoothing for outliers 30% margins of error to the downside and 5% to the upside
5% to 14% CAGR margin-of-error adjusted growth consensus range
70% probability that MFC grows within this range over time
80% probability it grows at least at 5% (and delivers 10.2% long-term returns)
In the modern regulatory and low rate era, MFC’s growth rates have ranged from 7% to 19% CAGR.
Analysts expect growth similar to the last six years (13.4% CAGR), and management says it can deliver long-term growth similar to the last 12 years (10.4%).
What does all this mean for long-term high-yield investors?
Investment Strategy
Yield
LT Consensus Growth
LT Consensus Total Return Potential
Long-Term Risk-Adjusted Expected Return
Long-Term Inflation And Risk-Adjusted Expected Returns
Manulife (Analyst Consensus)
5.20%
13%
18.2%
12.7%
10.6%
Manulife (Management Guidance)
5.2%
11.0%
16.2%
11.3%
9.2%
Dividend Growth
1.6%
12.6%
14.2%
9.9%
7.8%
Value
2.1%
12.1%
14.1%
9.9%
7.7%
High-Yield
2.8%
11.3%
14.1%
9.9%
7.7%
High-Yield + Growth
1.7%
11.0%
12.7%
8.9%
6.7%
Safe Midstream
5.8%
6.3%
12.1%
8.5%
6.3%
Safe Midstream + Growth
3.3%
8.5%
11.8%
8.3%
6.1%
Nasdaq (Growth)
0.8%
10.7%
11.5%
8.1%
5.9%
Dividend Aristocrats
2.2%
8.9%
11.1%
7.8%
5.6%
REITs + Growth
1.8%
8.9%
10.6%
7.4%
5.2%
S&P 500
1.4%
8.5%
9.9%
6.9%
4.8%
REITs
3.0%
6.5%
9.5%
6.6%
4.4%
60/40 Retirement Portfolio
1.9%
5.1%
7.0%
4.9%
2.7%
10-Year US Treasury
1.9%
0.0%
1.9%
1.4%
-0.8%
(Sources: Morningstar, FactSet, Ycharts)
MFC has the potential to deliver a 5.2% very safe and rapidly growing yield today and life-changing 16% to 18% returns in the future.
far more than the S&P, Nasdaq, and aristocrats
or any major investment strategy
MFC Inflation-Adjusted Long-Term Return Potential: $1,000 Initial Investment
Time Frame (Years)
7.8% CAGR Inflation-Adjusted S&P Consensus
8.9% Inflation-Adjusted Aristocrat Consensus
14.0% CAGR MFC Guidance
Difference Between MFC Guidance And S&P
5
$1,453.07
$1,531.58
$1,925.41
$472.34
10
$2,111.43
$2,345.73
$3,707.22
$1,595.80
15
$3,068.06
$3,592.68
$7,137.94
$4,069.88
20
$4,458.12
$5,502.47
$13,743.49
$9,285.37
25
$6,477.98
$8,427.47
$26,461.92
$19,983.94
30
$9,412.99
$12,907.33
$50,950.16
$41,537.17
(Source: DK Research Terminal, FactSet)
Time Frame (Years)
Ratio Aristocrats/S&P
Ratio MFC Guidance and S&P
5
1.05
1.33
10
1.11
1.76
15
1.17
2.33
20
1.23
3.08
25
1.30
4.08
30
1.37
5.41
Is it worth paying 6.9X earnings for a high-quality 5.2% yielding insurance company to potentially earn 5.4X the market’s inflation-adjusted long-term returns?
I think so.
And here’s why MFC is such a potentially amazing investment opportunity today.
MFC Investment Decision Score
In fact, for anyone comfortable with its risk profile, MFC is a close to a perfect high-yield dividend growth blue-chip as you can buy in today’s market.
Reason Three: A Ridiculously Attractive Valuation
In the modern regulatory, low-interest rate era, tens of millions of investors have paid between 10 and 12.5X earnings for MFC.
Metric
Historical Fair Value Multiples (12-year)
2021
2022
2023
2024
12-Month Forward Fair Value
5-Year Average Yield
4.28%
$21.50
$24.05
$24.05
$26.40
13-Year Median Yield
3.72%
$24.73
$27.67
$27.67
$30.38
Earnings
10.99
$28.24
$30.66
$32.97
$36.27
Average
$24.52
$27.19
$27.77
$30.50
$27.30
Current Price
$19.63
Discount To Fair Value
19.93%
27.81%
29.30%
35.63%
28.10%
Upside To Fair Value (NOT Including Dividends)
24.90%
38.52%
41.45%
55.36%
39.08% (44% including dividend)
2022 EPS
2023 EPS
2022 Weighted EPS
2023 Weighted EPS
12-Month Forward EPS
12-Month Average Fair Value Forward PE
Current Forward PE
$2.79
$3.00
$2.25
$0.58
$2.83
9.6
6.9
I conservatively estimate MFC is worth 9.6X earnings, and today it trades at 6.9x.
Analyst Median 12-Month Price Target
Morningstar Fair Value Estimate
$24.89 (8.3 PE)
$22.50 (8 PE)
Discount To Price Target (Not A Fair Value Estimate)
Discount To Fair Value
21.13%
12.76%
Upside To Price Target (Not Including Dividend)
Upside To Fair Value (Not Including Dividend)
26.80%
14.62%
12-Month Median Total Return Price (Including Dividend)
Fair Value + 12-Month Dividend
$25.92
$23.53
Discount To Total Price Target (Not A Fair Value Estimate)
Discount To Fair Value + 12-Month Dividend
24.27%
16.57%
Upside To Price Target ( Including Dividend)
Upside To Fair Value + Dividend
32.04%
19.86%
Morningstar’s 8 PE fair value estimate is 90% likely to be too conservative based on market-determined historical fair values.
But even if Morningstar is right, MFC still has 20% upside potential to fair value.
And analysts expect 32% total returns in the next year alone.
Rating
Margin Of Safety For Low-Risk 13/13 Ultra SWAN Quality Companies
2022 Price
2023 Price
12-Month Forward Fair Value
Potentially Reasonable Buy
0%
$27.19
$27.77
$27.30
Potentially Good Buy
10%
$24.47
$24.99
$24.57
Potentially Strong Buy
20%
$21.75
$22.21
$21.84
Potentially Very Strong Buy
30%
$17.13
$19.44
$19.11
Potentially Ultra-Value Buy
40%
$16.31
$16.66
$16.38
Currently
$19.63
27.81%
29.30%
28.10%
Upside To Fair Value (Not Including Dividends)
38.52%
41.45%
39.08%
For anyone comfortable with MFC’s risk profile, it’s a potentially strong buy and very close to a very strong buy, and here’s why.
Consensus Total Return Potential That Knock Your Socks Off
For context, here’s the return potential of the 12% overvalued S&P 500.
Year
EPS Consensus
YOY Growth
Forward PE
Blended PE
Overvaluation (Forward PE)
Overvaluation (Blended PE)
2021
$206.39
50.44%
20.5
23.1
19%
31%
2022
$223.03
8.06%
19.0
19.7
10%
12%
2023
$245.83
10.22%
17.2
18.1
0%
3%
2024
$272.94
11.03%
15.5
16.4
-10%
-7%
12-Month forward EPS
12-Month Forward PE
Historical Overvaluation
PEG
25-Year Average PEG
S&P 500 Dividend Yield
25-Year Average Dividend Yield
$225.60
18.762
11.48%
2.21
3.62
1.43%
2.01%
(Source: DK S&P 500 Valuation And Total Return Tool) updated weekly
Stocks have already priced in 90% EPS growth from 2020 through 2024 and are trading at 18.5X forward earnings.
S&P 500 2023 Consensus Return Potential
Analysts expect the S&P 500 to deliver potentially -4% total returns over the next two years.
Year
Upside Potential By End of That Year
Consensus CAGR Return Potential By End of That Year
Probability-Weighted Return (Annualized)
Inflation And Risk-Adjusted Expected Returns
2027
42.90%
7.40%
5.55%
2.10%
(Source: DK S&P 500 Valuation And Total Return Tool) updated weekly
Adjusted for inflation, the risk-expected returns of the S&P 500 are about 2% for the next five years.
S&P Earnings Yield
10-Year US Treasury Yield
Earning Yield Risk-Premium (3.7% 10 and 20-year average)
5.33%
1.98%
3.35%
Theoretical Interest Rate Justified Market Fair Value Forward PE
Current PE
Theoretically Interest Rate Justified Market Decline
17.62
18.76
6.10%
(Source: DK S&P 500 Valuation And Total Return Tool) updated weekly
Even adjusting for low (and rising) interest rates, stocks still require a 6% correction before they become theoretically fairly valued.
But here’s what investors buying MFC today can reasonably expect (5% to 14% growth and 10 to 12.5X earnings)
MFC 2023 Consensus Total Return Potential
If MFC grows as expected and returns to historical fair value by 2023 that’s potentially 80% total returns or 38% annually.
MFC 2027 Consensus Return Potential (Management Guidance)
If MFC grows as expected and returns to historical mid-range fair value
But before you get too excited, and start measuring the drapes for your penthouse, don’t forget that even low-risk Super SWANs still have risk profiles you have to be comfortable with before investing.
Risk Profile: Why Manulife Isn’t Right For Everyone
There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.
MFC’s Risk Profile Summary
“Because of its balance sheet, Manulife is sensitive to changes in interest rates and equity markets. Manulife discloses that a 50-basis-point decrease in interest rates would reduce net income by about $100 million excluding changes to fair value.
In addition, Manulife’s asset management business is sensitive to changes in equity markets. Over the past several years, the company has taken steps such as adjusting its business mix and implementing hedge activities to decrease earnings sensitivity but hedging can be costly and add additional risks. Manulife does not attempt to fully hedge out all risks of its products.
From an environmental, social, and governance perspective, we view the largest risks as stemming from business ethics and product governance issues. For example, U.S. life insurer MetLife failed to pay thousands of workers’ pension payments and has settled with the SEC related to weak internal controls in its annuity business.
In addition, with CAD 764 billion in assets under management or administration, an operational failure could be costly. Lastly, given the millions of customers, failure to keep personal data secure and private could harm the company. We believe management has adequately managed ESG risks so far.” – Morningstar
economic cyclicality risk: mostly through interest rates and asset management fees
each 1% decrease in interest rates = 4% decline in net profit
each 1% increase = 4% increase in net profit
regulatory risk (domestically and internationally, pertaining to capital buffers)
M&A risk
margin compression risk: SFL and GWO are larger and have better economies of scale
labor retention risk (tightest job market in over 50 years and finance is a high paying industry) – rising wage pressures
currency risk (growing over time as Asian business is the fastest-growing part of the business)
The Asian market is a competitive one with domestic companies often having leading market share and firms are subject to various regulations. As an example, Manulife, along with other insurers, suspended selling company-owned life insurance policies in Japan because of uncertainty regarding the tax treatment of these policies. Revenue growth in Asia has been strong but we’d focus on profits as it has slipped and we believe growth is only accretive if it generates sufficient returns on equity.” – Morningstar
Global expansion is an opportunity, but one that brings its fair share of challenges and risks.
In general, higher interest rates should benefit the firm’s investment income. That said, higher inflation is likely to weigh on expense growth. Core expense growth was 5% in 2021 versus a modest decline in 2020. The expense efficiency ratio improved to 48.9% in 2021 from 52.9% in 2020. Manulife expects to be under 50% for 2022.” – Morningstar
MFC is doing a good job managing its costs but higher inflation around the world could put pressure on its labor costs and make it more difficult to achieve the expected growth that management and analysts are forecasting.
What Would Break/Weaken The Thesis On MFC
Fundamental safety falls to 40% or less (unsafe) – would require MFC’s core business model to fail dramatically
growth consensus falls to less than 4.8% CAGR for 6 years
if growth consensus fell to less than 4.8% CAGR for 6 years then I’d sell my shares
MFC’s role in any portfolio is to generate steadily growing income and 10+% CAGR long-term total returns with minimal fundamental risk
High-yield defensive sectors like midstream, utilities, REITs, healthcare, consumer staples, etc, have 8+% total return requirements
non-defensive sectors have 10+% return requirements to stay on the Phoenix list (and in my portfolio)
How long it takes for a company’s investment thesis to break depends on the quality of the company.
Quality
Years For The Thesis To Break Entirely
Below-Average
1
Average
2
Above-Average
3
Blue-Chip
4
SWAN
5
Super SWAN
6
Ultra SWAN
7
Perfect 100% Quality – only MA at the moment
8
These are my personal rule of thumb for when to sell a stock if the investment thesis has broken.
How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.
Material Financial ESG Risk Analysis: How Large Institutions Measure Total Risk
“ESG is just normal risk by another name.” Simon MacMahon, head of ESG and corporate governance research, Sustainalytics” – Morningstar
ESG factors are taken into consideration, alongside all other credit factors, when we consider they are relevant to and have or may have a material influence on creditworthiness.” – S&P
ESG is a measure of risk, not of ethics, political correctness, or personal opinion.
S&P, Fitch, Moody’s, DBRS (Canadian rating agency), AMBest (insurance rating agency), R&I Credit Rating (Japanese rating agency), and the Japan Credit Rating Agency have been using ESG models in their credit ratings for decades.
Dividend Aristocrats: 67th Industry Percentile On Risk Management (Above-Average, Medium Risk)
MFC Long-Term Risk Management Consensus
Rating Agency
Industry Percentile
Rating Agency Classification
MSCI 37 Metric Model
93.0%
AA Industry Leader – positive trend
Morningstar/Sustainalytics 20 Metric Model
87.8%
17.9/100 Low-Risk
Reuters’/Refinitiv 500+ Metric Model
87.1%
Good
S&P 1,000+ Metric Model
61.0%
Above-Average- Stable Trend
FactSet
90.0%
Industry Leader- Positive Trend
Consensus
84%
Very Good
(Sources: Morningstar, Reuters’, S&P, JustCapital, FactSet Research)
MFC’s Long-Term Risk Management Is The 45th Best In The Master List (91st Percentile)
master list average: 62nd percentile
dividend kings: 63rd percentile
aristocrats: 67th percentile
Ultra SWANs: 71st percentile
MFC’s risk-management consensus is in the top 9% of the world’s highest quality companies and similar to that of such other companies as
Merck (MRK)
Mastercard (MA)
Cummins (CMI)
British American Tobacco (BTI) – global aristocrat
AbbVie (ABBV) – dividend king
Equinix (EQIX)
Digital Realty Trust (DLR.PK)
Prologis (PLD)
Applied Materials (AMAT)
W. W. Grainger (GWW) – dividend king
Lowe’s (LOW) – dividend king
Blackrock (BLK)
Pepsi (PEP) – dividend king
The bottom line is that all companies have risks, but MFC is very good at managing theirs.
How We Monitor MFC’s Risk Profile
“When the facts change, I change my mind. What do you do sir?” – John Maynard Keynes
There are no sacred cows. Wherever the fundamentals lead we always follow. That’s the essence of disciplined financial science, the math retiring rich and staying rich in retirement.
Bottom Line: Manulife Is A 5.2% Yielding Blue-Chip Set To Soar And Too Cheap To Ignore
We live in troubled times.
It’s understandable that many investors, spoiled by an incredible bull market, might be scared right now.
After three years in which the market delivered 25% annual returns, it’s easy to forget that corrections like what we’re living through now are normal, healthy, and beneficial.
“Volatility isn’t risk, it’s the source of future returns.” – Joshua Brown, CEO of Ritholtz Wealth Management
But by focusing on the fundamentals that drive 97% of long-term stock returns, you can sleep well at night no matter what is happening with geopolitics, inflation, the economy, or interest rates.
MFC is one of the world’s safest, most dependable, and highest quality companies
a very safe 5.2% yield = 3.5X the S&P 500’s yield
a thriving Asian business has management forecasting 10% to 12% growth
thanks to a 5% buyback authorization analysts expect 13% growth
MFC’s buyback potential is almost 40% of shares at current valuations through 2024
6.9X forward earnings = anti-bubble price pricing in -3.2% long-term growth
28% discount to fair value = potentially good buy
classic Buffett-style “wonderful company at a wonderful price”
195% consensus total return upside over the next five years = 4.5x the S&P consensus
15% CAGR 5-year risk-adjusted expected return is 3X that of the S&P 500
I can’t tell you when the market will stop declining or reach a new record high.
Morgan Stanley and JPMorgan think the bottom is coming in the next eight to 10 weeks
the bond market thinks stocks might not bottom until February or March…of 2023 and not hit a record high until March or April…of 2024
What I can tell you is that the world’s highest quality high-yield blue-chips are always a safe place for your long-term discretionary savings.
That’s especially true when they are trading at anti-bubble valuations of 6.9X earnings.
All of this means that if you’re looking to make your own luck on Wall Street, Manulife Financial is one of the most reasonable and prudent choices you can make today.
In fact, it’s as close to a perfect high-yield blue-chip opportunity as exists on Wall Street today.
Author’s Note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.