Financial and fintech stocks: 2 buys and a hold

The MoneyLetter recently took a look at a Canadian global financial services provider, a specialized financial technology services provider and a global tech stock that is one of the world’s largest financial information technology providers.

Manulife Financial Corp. (TSX—MFC; NYSE—MFC) has done better than expected. Shares of this blue chip stock moved nicely higher in the wake of third-quarter earnings that beat expectations. The company’s core earnings were $0.49 a share, two cents better than analysts’ consensus estimate of $0.47. Manulife shares responded by rising from about $19.50 prior to the earnings release to approximately $23 after the release.

Manulife is a leading international financial services provider. The company operates as John Hancock in the U.S., and Manulife elsewhere. It provides financial advice, insurance and wealth and asset management solutions for individuals, groups and institutions.

Focused on optimizing performance of all divisions

For the nine months ended Sept. 30, 2016, Manulife made $2.7 billion (core earnings), or $1.34 a share, compared with $2.6 billion, or $1.27 a share, in the same period of 2015. The increase was driven by core investment gains, in-force and new business growth in Asia, and improved policyholder experience due to an annual actuarial review.

Investment gains were broad-based across Manulife’s general investment portfolio and included gains related to fixed-income reinvestment, higher-than-expected returns on alternative long-duration assets and strong credit experience.

Manulife operates in a difficult macroeconomic environment, but it remains focused on optimizing the performance of all its businesses and aggressively growing those that deliver the highest returns. The latter include the Asian business and the global wealth and asset management businesses.

The stock trades at a reasonable 12.5 times Manulife’s projected 2016 earnings of $1.83 a share. The current annual dividend of $0.74 a share yields 3.2 per cent.

Manulife is a buy for growth and income.

Financial technology stock DH Corp. struggling

We placed DH Corp. (TSX—DH) on a hold after it released third-quarter results that fell well short of expectations and issued a weaker-than-expected outlook. Results reflected softness due to the renewal cycle for the company’s LaserPro product and accelerated declines in chequing volumes.

DH is a financial technology services provider. The company provides global payments, lending and financial solutions to nearly 8,000 banks, specialty lenders, community banks, credit unions, governments and corporations.

For the nine months ended Sept. 30, 2016, DH made $157.2 million, or $1.47 a share, compared with $172.2 million, or $1.76 a share, in the same period of 2015.

An increase in amortization of intangible assets and finance expenses negatively impacted the bottom line. Results also reflected a 4.6-per-cent decline in earnings before interest, taxes, depreciation and amortization, or EBITDA, to $293.8 million due to a decrease in lending revenues at the lending and integrated core solutions (L&IC) segment. This segment has suffered from lower LaserPro renewals.

Fintech stock offers substantial recovery potential

DH remains optimistic about the long-term, believing it can deliver high annual single-digit growth in adjusted earnings per share. The problem lies in the short-term. An uncertain economic environment, which has caused global financial institutions to delay financial technology spending, and potentially higher check volume declines, should hurt near-term profit.

DH shares offer substantial recovery potential assuming that its growth outlook does indeed improve as expected. The shares, after all, trade at just 7.3 times this year’s forecast earnings of $2.00 a share. But we caution that they may remain at this depressed level until the company shows significant signs of improvement.

And though DH’s dividend yield is now an attractive 8.8 per cent, the payout may be cut if management chooses to redeploy this cash to growth opportunities. DH is a hold for now.

Fintech stock CGI Group favours share buybacks

Montreal-based CGI Group (TSX—GIB.A; NYSE—GIB) earned more in fiscal 2016 and is expected to earn more this year and next. This blue chip stock rewards its shareholders by buying back shares. Even so, the company pays no dividends. As a result, CGI remains a buy for long-term share price gains, if you need no dividends.

CGI describes itself as “the fifth-largest independent information technology and business process services firm in the world. Approximately 68,000 professionals serve thousands of global clients from offices and delivery centers across the Americas, Europe and Asia Pacific, leveraging a comprehensive portfolio of services, including high-end business and IT [Information Technology] consulting, systems integration, application development and maintenance and infrastructure management, as well as 150 IP [Internet Protocol] based services.” The U.S. and Canada account for revenue of $4.415 billion—over 41 per cent of CGI’s total revenue in fiscal 2016.

Responding quickly to increasing demand

In the year to September 30, CGI earned $1.082 billion, or $3.46 a share, excluding one-time items in both years. This was up by 10.5 per cent from earnings of $1.006 billion, or $3.13 a share, the year before. CGI’s earnings per share rose more than its total earnings. That’s because it bought back shares last year. It repurchased a net 7,354,651 Class A shares and 420,018 Class B shares.

In fiscal 2016, CGI’s revenue rose by nearly 3.9 per cent, to $10.683 billion. Operating costs—excluding restructuring costs—inched up by 3.1 per cent, to $9.201 billion. With revenue up more than costs, its pre-tax income jumped by more than 12.7 per cent, to $1.482 billion.

President and chief executive officer George Schindler said: “Increasing customer demand for digital services offers an extraordinary opportunity. The goal of digital transformation is to become more agile, responding quickly and creatively to customer preferences and, in doing so, deliver meaningful business value.”

Optimistic outlook for this blue chip tech stock

At the start of fiscal 2017 (on October 1), CGI’s order backlog totaled $20.893 billion. This was nearly twice its revenue. This should keep the company busy in the quarters ahead.

In fiscal 2017, CGI’s earnings are expected to grow by 8.1 per cent, to $3.74 a share. Based on this estimate, the shares trade at a price-to-earnings, or P/E, ratio of 17 times. Next year, its earnings are expected to grow by 5.9 per cent, to $3.96 a share. Based on this estimate, the shares trade at a better P/E ratio of 16.1 times.

Mr. Schindler is optimistic about CGI’s outlook for the years ahead. He said: “Our end-to-end global capabilities, deep local relationships and expansive IP portfolio, position CGI as the partner of choice.”

The consensus recommendation of 11 analysts is ‘buy’. We agree, but only if you need no dividends. With a net debt-to-cash-flow ratio of 0.9 times, CGI has the balance sheet strength to reward shareholders with dividends as well as share buybacks. 

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846