Manulife CEO Donald GuloienMIKE CASSESE
If you are drawn to beaten-up, unpopular stocks, then Manulife Financial Corp. beckons. Once a darling of the Canadian stock market, it has fallen on hard times with the financial crisis and ensuing market volatility.
Over the past two years, it has halved its dividend, diluted existing shareholders by doubling the number of outstanding shares and reported bafflingly inconsistent earnings from quarter to quarter. These are the sort of moves that can put a stock on the DL for a long time.
Then there's the share price itself. While the Big Banks have more or less recovered from the stock market downturn, Manulife remains about 60 per cent below its 2007 high. In other words, it was pummelled during the bear market and ignored during the bull market.
While it is relatively easy to find the courage to scoop up a stock that has fallen on hard times (they call it bargain hunting), it is a lot harder to buy a stock that is down and ignored - and Manulife appears to have fallen into this latter category.
However, there are a few reasons why the stock is attractive right now. Manulife doesn't exactly operate in a dying industry that will never spring back to life, which means that its problems can be fixed.
These problems are mostly associated with the fact that some of its products were tied to stock market performance - and the bear market downturn put the value of these products under water, saddling Manulife with enormous losses on paper.
Manulife is now in the process of reducing its sensitivity to stock market gyrations, partly through the use of a hedging strategy. The recovery of the stock market over the past two years has also helped, of course.
At the same time, it has been building up the insurance and wealth management areas of its business, where sales have jumped by doubled digits over the past year.
Investors for the most part have failed to take notice of these improvements, which is partly why the shares trade at just 11-times estimated earnings versus 15.7-times earnings for all financial stocks within the S&P/TSX composite index.
When Manulife reported its first-quarter results on Thursday - delivering better-than-expected operating earnings - the shares ended the day down 1.9 per cent. Curiously, they bounced 5.1 per cent on Friday, suggesting a delayed reaction on the part of investors.
For sure, this isn't an easy stock to love and it's not the best choice for anyone with a bearish disposition on the broader market. However, if more investors wake up to fact that Manulife is on the mend, the stock will win friends soon enough.
David Berman