Recent concerns about this blue chip financial stock are overblown in our view, making it a bargain stock for value investors seeking an attractive buy for growth and income.
Global stock Manulife Financial Corp.’s (TSX─MFC; NYSE─MFC) shares are currently trading about 20 per cent below the $22-level they traded at last fall and approximately 25 per cent below the $24-level they traded at last summer. A number of factors have weighed on the company’s share price since then.
One reason for the appeal of financial stocks like insurance companies has been the consideration that they should earn more once interest rates rise, as the insurance premiums they earn are typically invested in bonds. But forecasts for rising interest rates not all that long ago have given way to the notion those rates are bound to remain lower for longer, and this has caused investors to be wary of insurance company stocks.
Another factor that has weighed against Manulife is its large Asian exposure, which accounts for about a third of its business. Investors began to look askance at this exposure late last year as concerns about a China slowdown and a strong U.S. dollar caused investors to pull their money out of emerging markets.
More recently, Manulife reported in February that its fourth-quarter 2015 financial results had been marred by oil and gas losses. Though the company’s underlying business continued to grow in the quarter, investors didn’t like the idea that its energy losses would prevent it from reaching its core earnings target of $4 billion in 2016.
Despite all these setbacks, though, Manulife has continued to deliver solid results this year. For the three months ended March 31, 2016, Canada’s largest life insurance company made $905 million (adjusted), or $0.44 a share, compared with $797 million, or $0.39 a share, in the same period of 2015. The increase reflects strong growth in new business, particularly in Asia, and $75 million related to changes in foreign exchange rates.
We view Manulife’s growth prospects in Asia positively. Insurance sales in this region increased 36 per cent in the first quarter, driven by double-digit growth in most territories, including Singapore and Hong Kong. Economic turmoil in the region could have a negative impact on growth in the near term. But emerging markets have superior growth potential to developing markets over the longer term. And this bodes well for Manulife’s financial results.
Similarly, Manulife’s wealth and asset management businesses have continued to deliver positive inflows despite global market volatility. These businesses, too, should do well in the long term.
Manulife expressed confidence in its outlook earlier this year when it increased its quarterly dividend to $0.185 a share from $0.17.
Manulife trades at just 9.5 times the $1.90 a share that it will probably earn in 2016. It yields 4.1 per cent and is a stock to buy for growth and income.
Money Reporter, MPL Communications Inc.
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Money Reporter •5/29/16 •