Manulife Financial Corp.: A Deeply Discounted Way to Play the Fed Rate Hike

At a valuation of .90x book value, Manulife Financial Corp.’s (TSX:MFC)(NYSE:MFC) deep discount to its peers and strong dividend yield presents an excellent buy in the face of changing macroeconomic conditions.

| More on:
The Motley Fool

Fed rate hike jitters have once again gripped the capital markets following the surprisingly hawkish tone adopted by Chairwoman Janet Yellen and Vice Chair Stanley Fischer during last week’s Jackson Hole symposium. Moreover, in the days since Jackson Hole, the capital markets have begun to price in a one-in-three chance of a September hike (up from June’s near-zero levels), while the U.S. dollar has rallied sharply against its international counterparts.

For the commodity-heavy TSX, tighter U.S. monetary policy means lower commodity prices and, of course, an increase in the cost of debt borne by some of Canada’s most leveraged producers. Conversely, Canadian financials are expected to fare much better in the changing global macroeconomic conditions with higher U.S. interest rates expected to increase debt yields and the margins received on lending.

One such name in the financial sector that stands to benefit from a rate hike is Manulife Financial Corp. (TSX:MFC)(NYSE:MFC).

Manulife’s discounted valuation

Manulife’s most recent Q2 2016 core EPS came in at .40 (down 8% year over year), well below consensus estimates of .46. Moreover, adverse U.S. policy holder experience, predominantly from the long-term care sector, led to an 11% year-over-year decrease in U.S. core earnings, which, combined with management’s forecast of a pending $500 million actuarial charge in Q3 2016, compounded to a less than stellar report.

Unsurprisingly, Manulife was sold off by the market and currently trades well below its all-time highs made in June 2015. This noticeable drop in share value has contracted Manulife’s valuation to levels not seen since 2009 with a price-to-book value of just 0.90 times–below the sector median of 1.3 times among the Canadian Lifecos.

Discount not pricing in growth prospects

Manulife’s Asian division continue to be the company’s shining star. Sector core earnings were US$266 million in Q2 2016 compared to US$230 million in Q2 2015–an increase of 16%.

Furthermore, Manulife enjoyed a record quarter for annualized premium sales in Asia at US$627 million–34% higher than in Q2 2015, while its partnership with DBS continue to pay off as all four Asian segments recorded strong sales growth from the prior quarter. Wealth and Asset Management divisions across Canada and the U.S. also continued to perform strongly with a 7% year-over-year increase and 5% year-over-year increase, respectively.

Strong yield adds to bull case

Manulife stands to benefits from higher interest rates and subsequently a higher U.S. dollar as net income from foreign operations are translated into Canadian dollars. Furthermore, according to a recent research report by Barclays Capital, Manulife exhibits a roughly $100 million parallel movement on its earnings from a +/- 50 basis point change in interest rates (Q4 2015 figures), making the company an ideal way to seek exposure to potential a rate hike.

Finally, for income-oriented investors, Manulife pays out a hefty 4.04% yield, which has been steadily increasing over the last three years, even in the face of low energy prices and interest rates.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Zaw Tun has no position in any stocks mentioned.

More on Investing

Business man on stock market financial trade indicator background.
Tech Stocks

1 Growth Stock Down 50 Percent to Buy Right Now

There are plenty of growth stocks in the market worth considering, but Shopify (TSX:SHOP) looks like one of the best…

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

edit Sale sign, value, discount
Stocks for Beginners

These 3 Growth Stocks Are on Sale and Set to Surge

Some growth stocks are on sale right now that offer massive long-term potential for investors. Here's a trio to consider…

Read more »

Cannabis grows at a commercial farm.
Cannabis Stocks

Why Canopy Growth Stock Could Double in 2024

Canopy Growth (TSX:WEED) stock saw its share more than double in the last two weeks. So, can it do it…

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »