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Mail Bag: Manulife (MFC) Part II

In a recent E-Mail a reader asked,

Brad,


I know that you have always been a fan of Manulife as a DivG investment. Currently I don’t own any shares and I am considering taking an initial position. As you are probably well aware MFC took a 50% dividend cut. I was wondering whether this action has changed your view of MFC as a good DivG investment.


Jeroen

I had an opportunity in late September to attend the Thursday session of the Scotia Capital Financials Summit as a guest of a client when new Manulife CEO Donald Guloien spoke on the future prospects of the business.

For the majority of the day a host of companies spent their time highlighting their current or new initiatives on risk reductions to calm anxieties over last years global financial crisis and Guloien’s presentation was no different.  A CEO is the face of a business and in many ways a corporate politician, but Guloien did take the time to discuss the current situation Manulife finds itself in.  The big emphasis was on the availability of capital and strengthening an already dominant market position in life insurance products.

The main challenges I noted that the company faced dealt with the actual and perceived impact of equity markets on their variable annuity products, the low interest rate environment the company currently finds itself in and the capital they require to participate in adventagious acquisitions.  I did enjoy hearing that the company intends to raise its margins and charge a higher premium for risk (something they failed to do in the past).  I was impressed by the fact that Manulife is now the 4th largest global life insurer behind China Life, AXA and Generali putting the company in a good position to leverage their scale globally.

The company did lose their AAA credit rating (they remain AA+) and I wasn’t impressed with the earnings guidance they presented for 2009/2010 because they chose to exclude any impact of market conditions on their segregated fund guarantees.  Guloien did attempt to soften the unease of the company reducing its dividend by 50% by stating that the company’s capital position now and in the future is better served by retaining more earnings within the business.  It was quite clear to me (and others) that management within the company is still concerned of their exposure to equity markets and that cutting the dividend was a prudent decision to save the approximately $700 million for other purposes.  The withdrawing of what the company terms “rich features” from products appears to be a conservative move but there was limited information available on a new line of variable annuity products Guloien mentioned in the presentation.

Not a lot changed with respect to the asset quality of their insurance assets (see Taking Stock in MFC) but I was concerned with a chart that showed the company still has considerable exposure to unrealized losses that could impact asset values if sold.

To answer Jeroen’s question directly I am still a fan of Manulife despite the troubles the company faced over the past twelve months.  I wasn’t thrilled with the 50% cut in their dividend, but when capital is at the premium we saw earlier this year when companies came to the market to raise money prudent decisions are necessary.  I don’t expect the dividend to rise anytime in the next 12 months, but I have done well with the stock as I bought near the bottom of its 52-week low and the company continues to occupy a 3.40% position in my Dividend Growth portfolio (DivG).

I don’t see any reason, at present, to overweight MFC as I did with the Canadian banks I hold but I still feel their strength of operations in insurance and annuities will help them smooth out the wrinkles left over from their foray into segregated funds; a lesson they will likely remember for a long time.  MFC is likely to remain a good long-term investment that should reward investors with patience.  It still remains at the core of my DivG portfolio, but a stock I watch much more closely than I did before.

Disclosure: I currently have a position in Manulife (MFC), Bank of Nova Scotia (BNS) and a life insurance policy with AXA

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