Manulife Downside Limited - Scotia Capital

Manulife Financial Corp. (MFC) chief executive Don Guloien likely did little to allay investor nervousness when he met with Scotia Capital recently and declared it was not his job to say a dividend cut would never happen.

News that the company's non-hedged guaranteed variable annuities have come under investigation by the Ontario Securities Commission and a U.S. class-action lawsuit, announced Friday, have not helped matters either.

Manulife's dividend yield has spiked to as high as 7% in recent months as company stock rolled from about C$40 last September to as low as C$9 in March before recovering to the C$19 level in July.

The yield currently sits at just above 5%.

Scotia Capital analyst Tom MacKinnon came away from a lunch meeting with Mr. Guloien impressed with the executive's honesty on the dividend issue and other topics, for better or worse.

"Unlike other CEOs Mr. Guloien is very open. He's blatantly honest and will explain both sides of any idea freely and openly with the Street," Mr. MacKinnon said in a note Friday. "His style will likely take a bit of getting used to."

The company's capital plan has changed little since the market rebound, and Manulife sees many opportunities for acquisitions down the road.

As for the dividend issue, Mr. Guloien said that the payout ratio is a function of core earnings and it is likely that Manulife will try to grow into its target payout ratio in the long run. Manulife's target ratio is 25% to 35%, while Scotia's 2010 estimate is 38%. Consensus is 41%.

"This 'he said this and he said that' game, in our opinion, has driven the stock down to levels suggesting a cut is certain, so we see limited downside," Mr. MacKinnon said. "Nothing has changed but honesty will get you nowhere."

Scotia maintains a Sector Outperform and C$30 target price for Manulife.