Manulife Financial Corporation (MFC) stock closed at $28.87 on Thursday, nearly reaching its 52-week high of $28.89. This impressive performance is driven by a combination of factors, including a thriving Asia business, a growing Wealth and Asset Management segment, and a strong capital position.
Manulife stands out as one of the dominant life insurers in its home market of Canada. It also boasts rapidly expanding operations in the United States and several Asian countries. The company’s earnings have consistently grown, showing a 4.9% increase over the past five years, outperforming the industry average of 4.6%. This robust performance is reflected in its stock price, which has surged by 30.6% year-to-date, significantly exceeding the industry’s 19%, the Finance sector’s 13.7%, and the S&P 500’s 17.7% gains.
Further bolstering the bullish sentiment surrounding MFC is its trading activity. The stock is currently trading well above its 50-day moving average, indicating a positive trend. Additionally, Manulife’s return on equity (ROE) for the trailing 12 months stands at 16.2%, surpassing the industry average of 15.5%. This demonstrates the company’s efficient use of shareholders’ funds. Manulife is targeting an even higher ROE of over 18% by 2027.
The company’s optimistic growth outlook is also reflected in the Zacks Consensus Estimate for 2024 and 2025 earnings per share, pegged at $2.72 and $2.86, respectively. This translates to a projected year-over-year increase of 5.8% and 5.2%. The long-term earnings growth rate is currently estimated at 10%, with Manulife projecting core EPS growth of 10-12% over the medium term.
One of the key drivers of Manulife’s success is its Asia business, which continues to be a significant contributor to earnings. This region has emerged as the fastest-growing insurance segment, fueled by strong volume growth and attractive margins. The market’s changing demographics present further opportunities for growth. By 2027, Manulife expects core earnings from Asia to make up 50% of its overall earnings.
As part of its strategic priorities, Manulife is also investing in high-return growth segments within North America. The company’s most promising businesses, including its operations in Asia, Global WAM, Canada group benefits, and behavioral insurance products, currently account for two-thirds of core earnings. The insurer aims to increase this contribution to 75% and is accelerating growth in these high-potential areas.
In line with the broader trend of digitalization, Manulife is implementing digitalization and automation initiatives in its workflows, leveraging GenAI and advanced analytics. These efforts are expected to lead to an expense efficiency ratio of less than 45% in the medium term.
Manulife has consistently strengthened its balance sheet by improving liquidity and leverage. It maintains a target leverage ratio of 25%. The company’s free cash flow conversion has remained over 100% for several consecutive quarters, a testament to its solid earnings. This strong cash flow position has enabled Manulife to increase dividends at a six-year CAGR of 10%. The company aims for a dividend payout of 35-45% over the medium term.
While the outlook for Manulife is positive, investors should remain aware of certain potential concerns. Despite targeting an expense efficiency ratio of less than 50% or $1 billion in cost savings and avoidance, Manulife’s net margin has contracted over the past six quarters.
As a substantial portion of Manulife’s earnings originates from the international market, its profitability remains vulnerable to foreign exchange losses. To mitigate this exposure, the company has implemented hedging strategies, which have incurred additional costs.
Although leverage has gradually improved, times interest earned has shown a decline. The return on invested capital for the trailing 12 months stood at 0.66%, slightly lower than the industry average of 0.68%. This indicates that the insurer may not be fully maximizing its use of funds to generate income.
From a valuation perspective, MFC shares are trading at a price-to-earnings multiple of 10.23, higher than the industry average of 8.40. Other insurers like Sun Life Financial (SLF) and Aflac Incorporated (AFL) are also trading at multiples exceeding the industry average.
Overall, Manulife’s focus on building a high-growth, high-return, and high cash-generating company, coupled with its commitment to shareholder wealth distribution and ROE expansion, inspires confidence in this Zacks Rank #3 (Hold) insurer. However, considering the stock’s premium valuation, new investors might be wise to wait for a more favorable entry point. Existing MFC shareholders should consider holding onto their shares given the company’s promising growth prospects.
