Canada’s largest insurer, Manulife Financial Corp. (TSX:MFC)(NYSE:MFC), recently disappointed analysts with its core fourth-quarter 2014 earnings coming in lower than the consensus forecast. This triggered some consternation among analysts who believe the outlook for Manulife might not be as rosy as investors believe. Let’s take a closer look to see whether it does deserve a place in your portfolio.
So what?
There were a number of concerns among analysts in Manulife’s 2014 results aside from missing fourth-quarter core earnings expectations. Among them was that low interest rates and declining policy sales in Canada and the U.S. continued to negatively impact its financial operations.
Furthermore, the gas and oil portion of Manulife’s investment portfolio saw its value plunge by 18% in only four months.
However, it wasn’t all bad news.
Manulife’s wealth management operations grew by 1% compared to 2013 to have assets under management of $52.6 billion. The fourth quarter of 2014 was also the 25th straight quarter of record assets under management for this business. The concerns regarding declining assets values for its oil and gas assets are also overblown as its exposure to the energy sector represents less than 1% of its total assets.
Despite the issues experienced by Manulife during 2014, I don’t believe the company’s fundamentals are as poor as some analysts believe. Manulife’s full-year 2014 profit exceeded internal targets and shot up 13% compared to 2013.
It has also taken significant steps to reversing declining insurance sales in Canada and the U.S. through a series of acquisitions. On January 30 of this year, it closed its acquisition of the Canadian operations of Standard Life Plc., further enhancing its domestic market share and boosting its presence in Quebec where it has traditionally been under represented.
It has also acquired New York Life Insurance Company’s Retirement Plan Services business. This enhances its wealth management presence in the eastern U.S. and gives Manulife a further US$135 billion of assets under management and 2.5 million plan members that can be targeted for further sales. The acquisition is expected to close in the first half of 2015.
Moreover, its Asian growth strategy continues to gain momentum with 2014 insurance sales growing an impressive 31% compared to the previous year. This is particularly important with Asia being one of the most important growth markets globally and also one of the hardest for financial services companies to successfully enter.
I certainly understand the concern among analysts and investors over the decline in the value of Manulife’s oil assets as well as their further concern over its decision to back up the truck and acquire more oil assets.
Nonetheless, I see this as a solid long-term strategy, with the recent sharp sell-off of oil stocks on the back of the rout in crude prices, creating a once-in-a-lifetime opportunity for investors. Manulife is evidently focused on exploiting this opportunity and its investment can only grow in value over the long term as the global oil supply glut dries up and energy demand increases.
Now what?
Despite the issues raised by analysts, Manulife has a solid growth strategy in place. Combined with some attractive valuation multiples, including a forward PE ratio of nine and an EV of five times EBITDA, this makes it a long-term deep-value opportunity for investors. Furthermore, patient investors will be rewarded by Manulife’s sustainable dividend yield of 3% while they wait for its share price to appreciate.
