After Manulife (TSX: MFC) reported its fourth-quarter (Q4) and full-year 2023 earnings on Valentine’s Day, the dividend stock popped almost 9% the next day! Obviously, something about the life and health insurance company has excited investors and enticed them to jump into the shares.
Actually, Manulife stock has been depressed for too long. Before this run-up, the value stock was trading at a blended price-to-earnings ratio (P/E) of about nine, while it had been increasing its adjusted earnings per share by almost 10% per year over the last decade. To be sure, the earnings growth did translate to dividend growth of approximately 10.9% per year in the period.
For most of 2023, the stock has actually consolidated in a sideways channel between $23 and $26. It had signs of breaking out in December and finally broke out this month after Manulife reported earnings.
Perhaps, one of the triggers of the stock valuation expansion is Manulife’s December 2023 announcement about a deal to reinsure $13 billion of its legacy assets, which included $6 billion of long-term care reserves. These assets had low returns on equity. The company’s presentation highlighted that this transaction “unlocks significant value for shareholders, while reducing risk,” in that the transaction essentially resulted in a “full risk transfer that was backed by trust and collateral protection.”
The transaction was estimated to release $1.2 billion of capital that Manulife planned to use for share buybacks. Consequently, it would result in a bit of earnings-per-share accretion.
One thing that investors always like is dividend increases. Manulife announced a dividend hike of 9.6% for its quarterly dividend. Its annual payout is now $1.60 per share. For sure, healthy dividend raises are always welcome. We’re probably looking at a sustainable payout ratio of about 45% of adjusted earnings this year.
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Manulife’s 2023 earnings by the numbers
For Q4 2023, Manulife posted core earnings of $1.8 billion, up 15% versus Q4 2022. Its core return on equity (ROE) was 16.4%, an improvement from Q4 2022’s 14.1%.
For the full year, the life and health insurer reported core earnings of $6.7 billion, an increase of 13% versus 2022. Its core earnings per share also jumped 17% to $3.47. Also, its core ROE improved by 1.9% to 15.9% year over year. As well, its book value per share went up 4% to $32.19.
The global insurer also witnessed growth across its business segments. Asia brought in core earnings of US$1.5 billion, an increase of 11% year over year. Canada’s core earnings rose 7% to CAD$1.5 billion, while the United States contributed to US$1.3 billion of core earnings, an increase of 8% versus 2022. Furthermore, Manulife’s global wealth management increased core earnings by 2% to CAD$1.3 billion.
Investing takeaway
Manulife came out with good 2023 earnings results. In late 2023, it entered into an agreement to reinsure $13-billion worth of legacy assets, reducing risk and improving shareholder value.
After earnings, the shares popped almost 9% higher. The recent price of $33.35 per share equates to a blended P/E of about 9.7. So, the stock is still cheap and has the potential to continue valuation expansion over the next few years if it continues to execute. It also just raised its dividend by 9.6%, providing a decent initial dividend yield of 4.8% for investors.
