- Manulife (TSX:MFC) reported Q4 2021 and full-year results Feb. 9
- MFC’s Wealth and Asset Management business turned in strong results
- The Wall Street consensus outlook is bullish
- The market-implied outlook is also bullish
Manulife Financial (NYSE:MFC), the Toronto, Canada-based, multinational financial services company, reported Q4 and full-year 2021 results Feb. 9, with Q4 EPS slightly beating consensus estimates. As expected, the most positive news comes from the Wealth and Asset Management (WAM) side of the business as well as the continued growth of new business in Asian markets.
Shares in the international financial services group have gained 10.6% so far in 2022, but the shares are 6% below the 2021 closing high of $22.16 posted on May 5.
The shares reached a 12-month low in late 2021 on news of higher life insurance payouts due to COVID-related deaths, but have since recovered.
Source: Investing.com
Management expects rising rates to be a net benefit due to the reduction in the present value of liabilities. Higher interest rates justify a higher discount rate. Broadly speaking, one expects insurers to see gains from rising rates for this reason, but it is reassuring to hear this directly from management.
MFC’s dividend yield is 4.9% and the payout ratio of 34% is reasonable. The company has raised the dividend growth rate in recent years, making the shares more attractive to income investors. The trailing 3-, 5- and 10-year dividend growth rates are 10.5%, 10.9%, and 6.4%, respectively. With these dividend growth rates and the current yield, the Gordon Growth Model suggests that a reasonable expectation for future total return is 15-16% per year.
I last wrote about MFC almost 6 months ago when I assigned a bullish/buy rating for four reasons. First, I considered the expectation of rising interest rates to be a positive. Second, the outlook on the basis of a dividend discount framework was appealing. Third, the Wall Street consensus outlook for MFC was very favorable. Fourth, the prices of options on MFC supported a bullish outlook.
Since the end of August, when MFC was trading at $19.91, the shares have risen by 4.5%. MFC shareholders have also received two dividend payments since Aug. 30, although only one of these had an ex-dividend date after Aug. 30. The Q3 dividend was $0.26 per share and went ex-dividend in early November and was paid in late December. Over this same period, the S&P 500 has returned a total of -4.3% (including dividends).
Many readers will be unfamiliar with the use of options price to form an outlook, so a brief explanation is warranted. The price of an option on a stock is primarily determined by the market’s consensus estimate of the probability that the stock price will rise above (call option) or fall below (put option) a specific level (the option strike price) between now and when the option expires. By analyzing the prices of call and put options at a range of strikes, all with the same expiration date, it is possible to calculate a probable price forecast that best reconciles the options prices. This is called the market-implied outlook and is, in effect, the consensus view among buyers and sellers of options.
With almost six months since my last analysis, I have calculated updated market-implied outlooks for MFC and compared these with the Wall Street analyst consensus outlook.
Wall Street Consensus Outlook For MFC
E-Trade calculates the Wall Street consensus outlook by combining the views of 10 ranked analysts who have published ratings and price targets over the past 90 days. The consensus rating for MFC is a buy, while the consensus 12-month price target is $24.13, as compared to $25.36 at the end of August.
The current 12-month price target implies expected price appreciation of 16.5%, for a total expected return of 21.4%. While the dispersion among the individual price targets is quite high, most of the variability is to the upside. The lowest of the 12-month price targets is 3.5% below the current price.
Source: E-Trade
Investing.com’s version of the Wall Street consensus outlook is calculated using the views of seven analysts. The consensus rating is a buy and the consensus 12-month price target is $24.70, 19.3% above the current price.
Source: Investing.com
The prevailing consensus rating for MFC is bullish and the consensus 12-month price targets imply total returns of 21.5% to 24.2%. This is an aggressively positive outlook given that the trailing 1- and 3-year total returns are 11.9% and 13.3%, respectively, and these are much higher than the annualized total returns over the past five to 15 years.
Market-Implied Outlooks For MFC
I have calculated the market-implied outlook for MFC for the 3.8-month period from now until June 17, and for the 6.8-month period from now until Sept. 16, using options that expire on these two dates. There are no options trading on MFC with an expiration date beyond Sept. 16. The lack of longer term options reflects the low level of options trading on MFC, which, in turn, reduces the confidence in the market-implied outlook as a leading indicator. There is much higher open interest in options expiring in June than in September.
The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
Source: Author’s calculations using options quotes from E-Trade
The market-implied outlook for MFC to June 17 is tilted to significantly favor positive price returns. The peak probability corresponds to a price return of +5% over the next 3.8 months. The outlook is significantly negatively skewed, with higher probabilities of large negative returns than for positive returns of the same magnitude. This is consistent with results from my August analysis and is worth noting because of research concluding that stocks with negative skewness tend to outperform those with positive skewness. The degree of negative skewness seen in the market-implied outlook is quite unusual. The annualized volatility calculated from this distribution is 27%.
To make it easier to directly compare the probabilities of positive and negative returns of the same size, I rotate the negative return side of the distribution about the vertical axis (see chart below).
Source: Author’s calculations using options quotes from E-Trade
This view shows that the probability of having a positive return is notably higher than the probability of having a negative return over the wide range of the most probable outcomes. (The solid blue line is above the dashed red line over the left half of the curve on the chart above.) This is a bullish outlook for MFC even though there is an elevated probability of very large negative price moves, albeit at a low overall probability (see the right third of the chart above).
The 6.8-month outlook to Sept. 16 is consistent with the 3.8-month outlook. The probabilities are tilted to favor positive price returns and the maximum probability corresponds to a price return of +6%. The annualized volatility calculated from this distribution is 25%.
Source: Author’s calculations using options quotes from E-Trade
While the market-implied outlooks for MFC must be interpreted with some caution because of the low option trading volumes, the options expiring in June and September indicate a bullish outlook with volatility of about 26%.
Summary
The overall outlook for Manulife remains favorable and the past year's results provide reasons for optimism. The dividend yield of 4.9% and the 5-year dividend growth rate of 10.9% per year should get the attention of income investors, especially given that the fundamental outlook appears solid.
The Wall Street consensus rating is bullish and the consensus 12-month price target implies a total return of 21.5% or higher.
As a rule of thumb for a buy rating, I want to see an expected total 12-month return that is at least half the expected volatility. Using the expected volatility from the market-implied outlook, the Wall Street consensus for expected return substantially surpasses this threshold. The market-implied outlooks continue to be bullish. So I am maintaining my overall bullish rating on Manulife.