Stock Breakdown: Manulife Financial (MFC.TO)

I mentioned in previous posts that I’ve purchased shares of Manulife. And added more. I currently have 2% of my investment capital in this company (since 75% is in cash, it’s a huge part of my stock portfolio). I’m considering buying even more as a good place to park money during this turbulent time. Let’s look into why that may be.

What does Manulife do?

Manulife is an insurance company. And it’s also a wealth management company.

Manulife has business in Canada, Asia, and Europe. As well as in the United States under the brand John Hancock.

When I worked full-time for companies in the past, many employers used Manulife as the provider of company benefits and the place where the company RRSP was provided. Their investment arm has CA$1.4 trillion under management, earning fees on that.

How does an insurance company make money?

The insurance business is a tricky game. It can be quite profitable. But the accounting of profits and losses is not so straightforward.

For example, if you sell $1 million of insurance contracts that cover future events, how do you account for the profit from that?

Do you book the $1 million as revenue/profit today and then deduct any payouts as losses later? It seems not.

Manulife uses a formula to unlock that profit. If history shows that an insurance contract is claimed evenly throughout the year, then maybe you can just count one-twelfth of that $1 million as monthly profit minus any claims. But if some insurance contracts are mainly claimed due to bad weather, that doesn’t happen evenly throughout the year.

So it seems like Manulife has to book profits unevenly, even if its business is stable. You don’t get month-to-month stability, but hopefully, it evens out over time.

Additionally, companies like Manulife invest their clients’ premiums and make money on investment gains. That $1 million is not sitting in cash; it’s earning interest in government bonds.

How does an investment company make money?

Traditional investment companies make money by charging fees on money managed. They may also charge employers flat-rate fees for managing their employees’ pension plans and such.

How do the financials look?

I would best describe them as flat over time.

Manulife’s top-line revenue has not grown over the past decade. Looking back 10 years, Manulife made $51.5B in 2011 and $49.3B in 2021. Their revenue can fluctuate quite a bit.

Their profit shows a similar pattern. In 2011, Manulife reported a gross profit of $32.5B; in 2021, it was $24.5B.

Given this flat (or slightly declining) revenue and profit, why do I like the stock?

It’s currently trading at a P/E ratio of 4.60. It has not traded at a lower P/E in the past 10 years. So the stock price doesn’t reflect a growth stock.

The company generates cash fairly consistently and can easily pay its 6.1% dividend. It’s only paying 25% of its income as a dividend.