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Manulife Financial: This Steady Dividend Grower Offers Plenty Of Portfolio Insurance

Summary

Manulife shares are trading in value territory for all valuation metrics.

The company is focused on profitable growth, both organically and through accretive acquisitions.

Asia, with its growing wealth and middle class, is a major growth driver for Manulife.

Manulife's stock has significantly underperformed the other Canadian insurers and global peers, as well as the broader market year to date. This is through no fault of the company itself. The business of insurance is challenged by the combination of record-low interest rates, volatility in global stock markets and flattening of the bond market yield curve. On a positive note, Manulife's sensitivity to equity markets and interest rates has declined from peak levels and is now lower than its peers' on a relative basis.

Insurance companies have what is termed "long-dated liabilities." They receive payments in the short term, which they invest, and the return from these investments drives their earnings and allows for the eventual payment of life insurance policies. Insurance assets are dominated by fixed income to limit portfolio risk. This worked when bond yields were much higher, but now, global interest rates are plumbing historical lows. The Bank of Japan surprised markets in January by adopting negative rates. The European Central Bank in 2014 was the first major central bank to push the rate on overnight deposits to below zero. Central banks in Sweden, Denmark and Switzerland also have implemented negative rates. Some $7 trillion worth of government bonds around the world have yields below zero. This has challenged insurers to deliver positive returns.

Manulife's investments are marked to market on a quarterly basis. The company relies on a third party to evaluate its oil & gas portfolio, and this appraisal is not public, but Manulife has disclosed that it tracks both forward and consensus price curves on a lagged basis. The accounting impact of the company's exposure to the decline in oil & gas prices through its energy investments cut into net income by $876 million in 2015, resulting in flat core investment gains that year versus a gain of $400 million the prior year. The weak energy market also forced the company to advise that its target of $4 billion for 2016 core earnings - which separate Manulife's underlying business from considerations such as the impact of interest rates and uneven equity markets - will be difficult to meet unless energy prices strengthen.

Given this overhang and the very short-term focus of the markets, Manulife's stock has come under pressure, which has created a long-term investment opportunity in its shares. When I speak of investing for the long run, I mean five to 30 years or more. That daunting time frame means picking companies that have the staying power to deliver returns for decades to come - companies with strong competitive advantages and high barriers to enter, or, to borrow Warren Buffett's term, companies with a broad economic moat. Like Mr. Buffett, my ideal holding period is "forever."

But with the stock trading at $18.50 per share, even short-term investors might be tempted to jump in and buy on the low. History suggests this is a good approach. Manulife has traded below $20 six times in the past two years, and the stock rose an average of 9% in the following three months.

Before I further flesh out the investment thesis for Manulife, first a brief description of the company. Manulife Financial Corporation (NYSE:MFC) is a financial services company and Canada's largest insurer. It is among the largest life insurers globally as measured by market capitalization. The company is a leading global provider of financial protection and wealth management products and services to personal and business clients, as well as asset management services to institutional customers. Its principal operations are in Asia, Canada and the United States. The company operates as Manulife in Canada and Asia, and primarily as John Hancock in the United States. John Hancock saw an increase in mutual fund flows of 14% in 2015, and in January of this year, the company further expanded its market presence with a new life insurance partnership with Discovery Ltd.'s Vitality Group.

Manulife is one of 42 of the S&P/TSX 60 companies which list their shares on both Canadian and U.S. exchanges. In the case of Manulife, it is dual-listed on the TSX, where its average daily trading volume is 5.28 million, and the NYSE, where it trades an average of 3.88 million shares per day, for a relatively small trading volume differential ratio of 1.36.

Given the relatively small volume differential ratio between the TSX and NYSE, the "price discovery" for Manulife shares - that is, which country's exchange drives the stock price, based on the highest trading volume - is muted. Contrast this to Agrium (NYSE:AGU), for example, which was my previous article for Seeking Alpha.

Agrium's NYSE-listed shares trade 4.4 times its TSX volume. However, given the higher trading volume on the TSX, I have used the TSX and Canadian currency in this article, unless otherwise noted. In general, a Canadian company that is dual-listed and trades in similar volumes on...


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