Manulife Financial Corporation (MFC) is the largest insurance company in Canada and, through its ownership of John Hancock Financial, one of the key factors in the United States. Its main offerings include life insurance, mutual funds, group pension management, group benefits, private wealth management, and long-term healthcare policies. In 2012, “core earnings’’ were derived 38% from the United States, 33% from Asia, and 29% from Canada. The company introduced core earnings in its 2012 annual report to distinguish its calculation of economic profits from net income according to International Financial Reporting Standards, which distort the picture by requiring that derivatives and other temporary revenues and costs be run through the P&L. Core earnings were C$1.12 a share in 2012, compared with C$1.14 in the prior year.
Manulife distributes its products and services through several channels, including a general agency, career agencies in the United States and Asia, independent financial advisors (insurance agents), and bancassurance agreements in Asia. This year, it has extended its networks through new bancassurance contracts in Asia and acquisitions of a broker network in the United States, and a third-party insurance administrator and a travel insurance business in Canada.
In 2012, Manulife’s sales were among the top three insurance and wealth management companies for a variety of products in several countries, including small company 401K plans in the United States; defined contribution pensions, group benefits, and individual insurance in Canada; and insurance in China and Vietnam. Good sales results continued in the first half of 2013, as wealth management and mutual fund sales rose 52% and 130%, respectively; insurance sales declined 12% in the first half, due to regulatory changes that boosted insurance sales in a couple of countries in last year’s first two quarters. Total funds under management stood at a record $567 billion as of June 30, 2013.
Manulife’s financial position is satisfactory. Its required capital ratio is good, but its debt to total capital is a bit high now, at about 33%. Thus, it would have to issue new equity to finance a large acquisition, though smaller deals, such as the recent moves cited above, seem possible without issuing new shares.
Manulife has announced ambitious growth plans for the next few years. The company hopes to lift core earnings by about 80%, to around C$4 billion, by boosting profits in all three regions, with around 40% of the expanded bottom line coming from insurance, 40% from wealth management, and 20% from cost cutting. Given that financial services are a mature industry in North America, we expect that acquisitions will be important to Manulife’s tactics in the United States and Canada, while new distribution agreements and organic growth will account for the biggest share in Asia. Manulife does not do business in India or Korea now, so establishing footholds in those major markets could prove essential to achieving its growth goals. And there is hope that India will implement regulatory changes to make investing there more profitable in the not too distant future.
Frankly, we’re a bit skeptical that a financial services company can grow this fast without financing growth through dilutive new stock sales. Still, Manulife has good market positions and gets high marks as a place to work in Canada. Even if earnings grow considerably less rapidly through 2016 than the planned 16% annual pace, and share net advances more slowly than that due to new stock issuance, earnings per share could well rise a good deal faster than is typical for this industry. Moreover, investors would likely be “paid to wait” through a roughly 3% dividend yield, which is about the highest in the industry, and much more than the yields of industry leaders MetLife (MET) and Prudential Financial (PRU). Manulife says it needs to lower its leverage before lifting the payout, but that step could still come by 2015. We suggest that investors seeking exposure to financial services and Asia take a look here.
At the time of this article’s writing, the author did not own positions in any of the stocks mentioned.