Manulife Financial: Equity Growth Depends On Rate Outlook, Asset Management Division

Manulife Financial (NYSE 🙂 is Canada’s largest insurance company in total assets. In addition to various types of insurance, including annuities, the company offers a range of money management services.

MFC anticipates that much of its growth will come from its Wealth and Asset Management (WAM) division. The low interest rate environment of recent years has been difficult for insurance companies and MFC is no exception. Uncertainty over the interest rate outlook limits earnings expectations for MFC.

Manulife is well diversified geographically and much of the expected growth in the insurance and WAM business is should come from Asia. Globally, MFC’s WAM business exceeds 1000 billion dollars in assets under management and under administration. Looking ahead, the bullish narrative for MFC hinges on rising interest rates and substantial growth in WAM.

After closing at an annual high of $ 22.16 on May 5, the shares fell 10% to the current price of $ 19.91. After closing on December 31, 2020 at $ 17.82, shares are up 11.7% for the current year.

MFC: 12 month price history

Source: Investing.com

Over longer periods, MFC’s total returns have been poor and the 15-year total return is slightly negative. More recently, over 1, 3 and 5 years, MFC has significantly outperformed the life insurance industry, although these returns are much lower than those provided by the US stock market and the US financial sector.

The IShares US Financials ETF (NYSE 🙂 has returned over 13% per year over the last 3, 5, and 10 year periods, for example.

MFC: sliding total returns vs Life Ins.  industry, canadian market
MFC: sliding total returns vs Life Ins. industry, canadian market

Source: The morning star

MFC is a value stock, with a P / E TTM of 6.9 and a dividend yield of 4.5%. The PER ratio has been very stable since the end of 2018. Over the 3 and 5 year periods, the annualized dividend growth rate is about 11%. From the point of view of Gordon’s growth model, MFC should have expected returns of around 15% if the trailing dividend growth rate can be extrapolated forward.

P / E History for MFC

P / E History for MFC

Source: Macrotrends.com

Neither MFC nor its industry is generally considered to have great growth potential. Total stock returns will not attract the attention of investors in the current bull market. Based on the final P / E, MFC does not appear to be undervalued compared to recent years.

To formulate a point of view on MFC, I rely on two forms of consensual perspectives. The first is the well-known consensus rating and 12-month price target from Wall Street analysts. The second is the implicit market perspective, the consensus view of the options market as reflected in the prices of call and put options at a range of strike prices.

The price of an option represents the consensus opinion of the market on the likelihood of the price going above (call option) or below (put option) a specific level (the strike price) at from today until the expiration date of the option. By analyzing call and put options at a common strike price range and expiration date, it is possible to derive the overall view of the options market on the probabilities of possible price returns between now and expiration date.

For those who do not know this concept, I wrote a review article, including links to relevant financial literature.

Wall Street Consensus Outlook for MFC

ETrade’s calculation of the Wall Street Consensus Outlook combines the views of 10 ranked analysts who have posted opinions in the past 90 days. The consensus rating is bullish and the 12-month consensus price target is 27.4% above the current price. Even the lowest of analysts’ price targets is 6.9% above the current price. The implied price appreciation of the consensus price target is slightly below the 12-month rolling yield but well above longer-term historical yields.

MFC: consensus rating from Wall Street analysts, 12-month price target
MFC: consensus rating from Wall Street analysts, 12-month price target

Source: Electronic commerce

Investing.comThe Wall Street consensus version aggregates the views of 8 analysts. The consensus rating is bullish and none of the analysts give MFC a rating below neutrality. The 12-month consensus price target is 22.4% higher than the current price.

MFC Wall St. Analyst Consensus Rating, Price Target 12M
MFC Wall St. Analyst Consensus Rating, Price Target 12M

Source: Investing.com

Implicit Market Outlook for MFC

I analyzed the prices of the put and call options at a range of strike prices and two expiration dates. Options expiring January 21, 2022 provide an implied market outlook for the next 4.74 months and options expiring March 18, 2022 provide an implied market outlook for the next 6.57 months. I analyzed the options with these two expiration dates to give a view until early 2022 and then to check the consistency of the implied market outlook for a slightly longer period.

The standard presentation of the implicit market outlook is a probability distribution of the price return, with the probability on the vertical axis and the price return on the horizontal.

MFC: Implicit Market Outlook, 4.74M Period, Today-Jan.  21 2022

MFC: Implicit Market Outlook, 4.74M Period, Today-Jan. 21 2022

Source: Author’s calculations using eTrade option quotes

The implied market outlook for the next 4.74 months is heavily tilted towards positive price returns. The probability peak corresponds to a price return of 5% over this period. The median price return of this distribution (50% probability of having a higher return / 50% probability of having a lower return) is 1%. The annualized volatility derived from this implied market outlook is 24%. This is quite low for an individual stock. This implicit market outlook is distinctly bullish.

To make it easier to compare the probabilities of positive and negative returns of the same magnitude, I rotate the negative return side of the distribution around the vertical axis (see chart below).

MFC: Implicit Market Outlook, 4.74M Period, Today-Jan.  21 2022

MFC: Implicit Market Outlook, 4.74M Period, Today-Jan. 21 2022

The negative side of the distribution has been rotated around the vertical axis (Source: author’s calculations using eTrade option quotes)

This view shows that the probability of having a positive return is significantly higher than for a negative return for a range of most likely outcomes (returns in the range +/- 10%), which supports a bullish view. For large amplitude returns (+/- 15% or more) the probability of negative returns is higher than for positive returns, but overall these are low probability outcomes.

One limitation in interpreting the implied market outlook for MFC is that options trading on this stock is light. This reduces confidence in the direction of prospects. However, when I analyzed the options expiring in March, the outlook is qualitatively the same, with the probability tilting strongly towards positive price returns.

MFC: Implicit Market Outlook, 6.6 million period, today-March.  18 2022

MFC: Implicit Market Outlook, 6.6 million period, today-March. 18 2022

The negative side of the distribution has been rotated around the vertical axis (Source: author’s calculations using eTrade option quotes)

Over this longer time horizon, the maximum probability is a price return of 5.6% and the annualized volatility is 23%. This implied bullish outlook for the market is reassuring, but overall confidence in the results is modest due to weak options trading.

Summary

The last few years have been difficult for insurance companies, in large part due to low interest rates. MFC has responded to this business environment by focusing on expanding Wealth and Asset Management (WAM), a group of lines of business with higher margins.

Stocks are cheap compared to, but higher multiples are based on evidence of faster earnings growth. For the moment, the market does not seem convinced.

However, the consensus opinion of stock analysts who follow MFC is remarkably bullish, with 12-month price appreciation expected to exceed 20%. The implicit market outlook for MFC through early 2022 is also bullish, with a maximum probability of price returns of 5-6% over the next six months. The annualized volatility derived from options is approximately 24%.

Taking the analyst consensus price target at face value, MFC expects a price return of over 20% with volatility of 24%. I find the expected return on a stock above half the volatility attractive, so MFC looks like a solid buy.

Tempering this bullish outlook, however, there is considerable uncertainty as to when interest rates will rise. The implied market outlook is bullish as well, the stock has moderate expected volatility and, let’s not forget, a dividend yield of 4.5%. I partially rule out the implied market outlook due to the low levels of option trading activity. I am broadly bullish, but I do not expect prices to return as high as analysts’ consensus.


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