Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) has rebounded nicely from the dark days of the Great Recession, and investors are wondering if it is time to step in and buy the stock.
Here are the reasons why I think investors should consider putting Manulife on their watchlist.
1. Asian assets
Manulife is betting big on Asia’s expanding middle class and growing population of senior citizens. The company just merged its Asian wealth and asset management operations to take advantage of the vast sums of money being held in bank accounts and term deposits in the region. The aim is to target cash-hoarding clients to help them invest their funds in products that offer better returns.
Manulife is also reported to be seeking a distribution deal with Signapore’s largest bank, DBS. Such a move would help the company extend its brand in that market.
Another distribution option in Asia could emerge from its recent deal with Standard Life Plc. Manulife just completed the $4 billion purchase of Standard Life’s Canadian assets, but the agreement also includes a new partnership to cross-sell products.
Standard Life is one of the few foreign insurers to have an established presence in India. The Indian government is planning to increase limits on foreign investment to help meet demand for products and services in the country’s burgeoning insurance industry. The long-term potential in India is huge, but it takes a lot of time and money to build a business from the ground up. Offering products through Standard Life’s existing footprint could be a way for Manulife to enter the market.
2. Solid balance sheet
Manulife slashed its dividend in half and raised capital during the financial crisis to shore up its balance sheet. Since then, the company has rebuilt its cash position and is now able to focus on growth through acquisitions.
At the same time, Manulife has reduced its exposure to volatility in equity markets and unfavourable moves in interest rates.
The company finished Q3 2014 with a healthy minimum continuing capital and surplus requirements ratio of 248%. This means it is well capitalized to weather unexpected financial shocks.
3. Dividend growth
Manulife increased its dividend last summer by 19%. Some pundits expected a higher boost to the payout, but the subsequent purchase of the Standard Life assets in Canada and a deal to purchase New York Life’s retirement plan services (RPS) business addressed the concerns.
Manulife still has a low payout ratio, and investors should see continued increases in the distribution. The current payout of $0.62 yields about 2.8%.
Should you buy?
Low interest rates make it difficult for insurance companies to earn enough returns on their invested funds to meet their payout obligations on policies. Although rates are likely to remain low in Canada, interest rates in the U.S. should start to move higher this year, and that could be positive for insurance stocks. Manulife only trades at about 10 times earnings, which is a discount to its peers. As a long-term bet, the company is probably a solid pick.
