Manulife Financial (NYSE:) is the largest insurance company in Canada by total assets. In addition to various types of insurance, including annuities, the company offers a range of money management services. MFC plans to have much of its growth come from Wealth and Asset Management (WAM). The low interest rate environment of recent years has been tough on insurance companies and MFC is no exception. Uncertainty about the interest rate outlook is limiting earnings expectations for MFC.
Manulife is well diversified geographically and much of the expected growth in both the insurance and WAM businesses is expected to come from Asia. Globally, MFC's WAM business has more than $1 trillion dollars in assets under management and control. Looking ahead, the bull story for MFC hinges on rising interest rates and substantial growth in WAM.
After closing at a YTD high of $22.16 on May 5, the stock is down 10% to reach its current price of $19.91. . Shares closed at $17.82 on December 31, 2020 and are up 11.7% for the YTD.
MFC: 12 Month Price History
Source: Investing.com
Over longer periods, MFC's total return has been moderate and the 15-year total return has been slightly negative. More recently, over 1, 3 and 5 years, MFC has outperformed the life insurance sector solidly, although these returns are much lower than the US stock market and US financial sector. For example, iShares US Financials ETF (NYSE:) has returned more than 13% per annum over its past 3, 5, and 10 year periods.
MFC: Trailing total return vs Life Ins. industry, Canadian market
Source: Morningstar
MFC is a value stock, with a TTM P/E of 6.9 and a dividend yield of 4.5%. The P/E ratio has been very stable since the end of 2018. Over the past 3 and 5 year periods, the annual dividend growth has been approximately 11%. From the Gordon growth model perspective, MFC should have expected returns of around 15% if the lagging dividend growth can be extrapolated forward.
Source: Macrotrends.com
Neither MFC nor its industry is generally considered a company with high growth potential. The stock's lagging total return will not attract the attention of investors in the current bull market. Based on the lagging P/E, MFC does not appear to be undervalued compared to recent years.
To formulate a view of MFC, I rely on two forms of consensus. The first is the well-known consensus assessment and 12-month price target from Wall Street analysts. The second is the market implicit outlook, 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 market's consensus view of the probability that the price will rise (call option) or fall (put option) above a certain level (the strike price) from today until the option's expiration date. By analyzing calls and puts with a series of strikes and a common expiration date, it is possible to derive the overall picture of the options market from the chances of possible price returns between now and the expiration date. unfamiliar with this concept, I have written an overview post, including links to the relevant financial literature.
Wall Street Consensus Outlook for MFC
eTrade's calculation of the Wall Street consensus forecast combines the views of 10 ranked analysts who have published opinions in the past 90 days. The consensus rating is bullish and the consensus price target for 12 months is 27.4% above the current price. Even the lowest price target of analysts is 6.9% above the current price. The price increase implied by the consensus price target is slightly below the 12-month trailing return, but well above the longer-term historical return.
Source: eTrade
Investing.com's version of the Wall Street consensus gathers the views of 8 analysts. The consensus rating is bullish and none of the analysts is rating MFC below neutral. The 12-month consensus price target is 22.4% above the current price.
Consensus assessment from MFC Wall St. analysts, price target of 12 million
Source: Investing.com
Market -Implied Outlook for MFC
I analyzed call and put option prices with a series of strikes and two expiration dates. Options expiring on January 21, 2022 provide market implied outlook for the next 4.74 months and options expiring on March 18, 2022 provide market implied outlook for the next 6.57 months. I've analyzed options with these two expiration dates to give a picture through early 2022 and then check for consistency in the market implied outlook for a slightly longer period of time. distribution of price return, with probability on the vertical axis and price return on the horizontal. 21 2022
Source: Author's calculations using options quotes from eTrade
The market-implied outlook for the next 4.74 months has tilted significantly to promote positive price returns. The peak probability corresponds to a price return of 5% over this period. The median price return of this distribution (50% chance of a higher return / 50% chance of a lower return) is 1%. The annualized volatility derived from this market implied outlook is 24%. This is quite low for an individual stock. This market implied outlook is significantly bullish. To make it easier to compare the probabilities of positive and negative returns of the same magnitude, I rotate the negative returns side of the distribution around the vertical axis (see chart below). ).
MFC: Market Implied Outlook, 4.74 Million Period, Today-January. 21 2022
The negative side of the distribution is rotated around the vertical axis (Source: author's calculations using option quotes from eTrade)
This view shows that the probability of a positive returns are significantly higher than negative returns for a range of the most likely outcomes (returns in the range of +/- 10%), supporting a bullish picture. For large returns (+/-15% or greater), negative returns are more likely than positive returns, but these are generally low-probability results. The outlook for MFC is that options trading on this stock is light. This diminishes confidence in the meaning of the outlook. However, when I analyzed options expiring in March, the outlook was qualitatively the same, with a strong bias towards positive price returns. -March. 18 2022
The negative side of the distribution is rotated about the vertical axis (Source: author's calculations using option quotes from eTrade)
Over this longer time horizon, the peak probability is is for a price return of 5.6% and the annualized volatility is 23%. This optimistic market-implied outlook is reassuring, but general confidence in results is modest due to light options trading. low interest rates. MFC has responded to this business environment by focusing on expanding Wealth and Asset Management (WAM), a group of higher margin businesses. . For now, the market seems unconvinced.
The consensus of equity analysts following MFC, however, is remarkably optimistic, with prices expected to rise more than 20% over 12 months. The market-implied outlook for MFC through early 2022 is also bullish, with a peak likely price return of 5%-6% over the next six months. The annual volatility derived from the options is approximately 24%.
Taking the analysts' price target at face value, MFC expects a price return of 20% + with a volatility of 24%. I consider the expected return for a stock greater than ½ of the volatility attractive, so MFC looks like a strong buy.
However, to temper that optimistic picture, there is considerable uncertainty about when interest rates will rise. The market implied outlook is also bullish, equities have moderate expected volatility and, let's not forget, a 4.5% dividend yield. I am ignoring the market implied outlook in part due to the low levels of options trading activity. I am generally optimistic, but I do not expect a price return as high as the analyst consensus.
