Manulife Financial is a great long term hold

Undervalued, reliable dividend and leverage to higher rates

Insurance companies profits rise as interest rates rise. Long term obligations like pensions and insurance reserves comprise future obligations discounted to the present at actuarial rates, and as rates rise the funding of these obligations falls. The difference is recorded as income or its equivalent.

Manulife (MFC.TO) is a well-managed life insurance company with a large wealth management section with over CAD$1 trillion under management or advisory. The stock trades at about 7.5 times net income after taxes, sports an 11.8% return on equity and the stock price of CAD$22.50 is roughly 90% of Book Value.

Financial companies like banks and large insurance companies have cash and investments as “assets” and deposits (in the case of banks), debt and long-term insurance risk as “liabilities” so Book Value is meaningful since it is more cash and hard assets than intangibles. Adjusted for intangible assets, Manulife stock has a book value of CAD$25.00. Banks today are trading at about 1.5 times book value for Canada’s Big Five (e.g., CIBC 1.45 times; RY 1.83 times and TD 1.68 times) and in my view are fully valued. Manulife is somewhat comparable in its risks and profit opportunity yet trades at 0.90 times Book. That suggests to me the stock is undervalued.

I don’t see any reason to expect MFC.TO stock to rise in trading price quickly to close the valuation gap since it has been a market “dog” for several years, but the value is there an over time trading prices converge on underlying value. The nearly 6% dividend is a plus and Manulife is more likely than not to keep increasing its dividend as profits grow.

I recently added 2,000 Manulife shares to my income portfolio. I expect I will add more over time. I judge the risk of material loss to be low and more than offset by current dividend income and potential longer term gains. I like to hold some low risk dividend paying stocks as an alternative to cash (although cash itself is an important part of my portfolio) since in a market rout such stocks are likely to fall less than higher Beta names and when blood is on the floor I can switch to advantage. Manulife meets my investment criteria for such stocks.