Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) CEO appeared at the Scotiabank Financials Summit in early September. The 35-year company veteran stood up and told everyone in the room that Manulife’s acquisition binge was coming to an end. In its place, the company is considering share repurchases.
Stock buybacks have become popular in recent years, and nowhere is that more evident than in financial services, where banks in both Canada and the United States are allocating significant amounts of capital to repurchase their shares.
Banks, given their stringent capital requirements, have to jump through more hoops than other companies when it comes to allocating shareholder capital, so when you see a bunch of them jumping on the bandwagon, you have to wonder why.
In May, Royal Bank of Canada announced it was looking to repurchase up to 20 million of its shares over the next 12 months, which represents 1.3% of the total outstanding.
South of the border, investors loaded up on bank stocks thinking interest rates were going to rise this year; that didn’t happen and bank stocks were hammered. Year-to-date, they’re down 6.2% compared to a 7.5% gain for the S&P 500.
As a result, U.S. banks are lining up to buy back stock, including JPMorgan Chase & Co., one of the world’s largest, which said it will repurchase up to US$10.6 billion over the next year. Between them and the rest of the big U.S. banks, buybacks currently on the table are easily worth more than US$30 billion.
If they’re buying back stock because it’s cheap, it follows that Canadian financial institutions are doing so for the same reason.
So, that brings us back to Manulife.
It hasn’t repurchased its shares since 2008 when it bought back 11 million for $403 million. These were part of a normal course issuer bid launched in November 2007, which called for it to repurchase up to 75 million shares, or 5% of its overall total. Previous to that its buybacks had been in the billions on an annual basis.
Of course, in hindsight, we now know that Manulife was facing financial problems at its U.S. John Hancock operations and hasn’t had the capital to allocate until now.
In 2008 Manulife paid approximately $36.64 per share to buy back its stock. Its pre-tax income that year was $577 million on $33 billion in revenue. In 2015 Manulife had $2.6 billion in pre-tax income on $34.4 billion in revenue. About the same amount of revenue generated five times the pre-tax income.
Yet its shares closed 2008 at $17.03–17% higher than where they sit today. At its zenith in October 2007, Manulife shares traded as high as $46.
Are they worth $46? No. But they’re not worth $14 either. I have no idea how many shares it might buy back. For Manulife shareholders’ sake, more is good.