Canada's Top Insurers Feud over the Size of Their Respective Dividends

Have Canada’s top insurance companies gotten into a spat over their respective dividends?

According to a Canadian Press article, Sun Life Financial Inc.’s (SLF) president Dean Connor told an investor conference on Thursday that the insurer will maintain its dividend – likely a welcome relief to investors who saw rival Manulife Financial Corp. (MFC) slash its own quarterly dividend recently.

“Our capital levels are strong, our capital sensitivities to market levels are low and we maintain significant cash on hand,” Mr. Connor said, according to the article.

But no sooner had Mr. Connor uttered these reassuring words than Manulife’s chief executive Donald Guloien – the man who took a hatchet to the insurer’s dividend in early August, cutting it in half in a move that shocked markets – shot back that maintaining a dividend may not be such a great idea in this market.

“I think the high payout ratios companies exhibit — unless they have a truly low-risk business — are not wise going forward in the financial services industry,” he said.

He was alluding to the fact that some companies have been paying out more in dividends over the past year than they have been taking in as earnings per share, due to plummeting profits. After Manulife cut its dividend, whether or not other companies would follow suit became an open question.

Still, this sort of exchange seems highly unusual to say the least. Despite all the fretting over dividends over the past year, and widespread cuts among financial services firms in the United States, we haven’t ever heard a chief executive suggest to others that a dividend cut might be in order.

It’s hard to know who’s right on this issue. In mid-afternoon trading on Thursday, investors seemed to be siding with Mr. Guloien, that lower payout ratios are more important than maintaining a dividend: Manulife shares were up 2.4 per cent, while Sun Life shares were flat.

However, Mr. Guloien’s helpful advice didn’t send investors fleeing other dividend paying stocks in the financial sector, on fears of widespread dividend cuts. Bank of Montreal, once seen as the most likely of the Canadian banks to cut its dividend, actually rose 1 per cent.

Perhaps Mr. Guloien was merely expressing frustration over the treatment of Manulife’s stock over the longer term.

Over the past 12 months, Manulife shares have lagged Sun Life’s by an amazing 23.6 percentage points, after dividends are taken into account. (Full disclosure: I have invested in Manulife.) They have also lagged the S&P/TSX financials index by 40 percentage points.

Comments

[cantudoit]

Considering what Mr. Guloien wants to do with some of the cash saved by lowering the div., (possible purchases of other income producing assets), I'd agree that MFC is a buy.

2009 Sep 18 10:44 AM

[Todd Campbell]

Interesting reading. Thanks!

There are significant assets available, providing inexpensive market share growth. Dividends are best paid when the alternative to shareholder return doesn't exist; ie. EPS growth. Obviously, however, there will be fallout as older retirees who count on dividend payouts rotate into other plays and growth investors, who ignore the industry typically, consider the upside for growth into the next cycle.

2009 Sep 18 11:24 AM

[comox]

I am very leery of Insurance companies, given that they could have a huge exposure to losses in the event of a global pandemic (H1N1, Avian Flus) killing thousands or millions of people. Why take the risk??

2009 Sep 19 11:04 AM

[anarchist]

not a problem, they will declare the swine/'bird flu as "an act of God".


On Sep 19 11:04 AM comox wrote:

> I am very leery of Insurance companies, given that they could have
> a huge exposure to losses in the event of a global pandemic (H1N1,
> Avian Flus) killing thousands or millions of people. Why take the
> risk??

2009 Sep 19 11:18 AM

[pdtor]

Keeeping the divident rate constant, if not backed up by by earning growth in a secular bear market may be a problem in the long term. Thus the divident seeking investor may be settiing him/her self for capital losses. The reason the yield on some divident stocks is so high is because the of falling stock price , and not increased earnings. Keeping a high divident rate in a secular bear market will lead to further capital losse, or as in the case of Manual life a cut in divident, and then a fall in capital as well

2009 Sep 20 08:58 AM