Manulife Combines Reliable Yield, Modest Valuation And Momentum

Summary

• Manulife has risen consistently and dramatically since its 2020 COVID lows.
• MFC has a reliable dividend yield of 4.3% and a modest valuation.
• The Wall Street analyst opinion is bullish.
• The options market is sending a modestly bullish signal.

Manulife (NYSE:MFC) provides a diverse set of insurance and investment products and services to a global client base. The company has incurred substantial unanticipated costs over the past year, but has also seen increased demand for its wealth and asset management business lines. While Manulife stock swooned along with the rest of the equity market in early 2020, it has recovered strongly from its 2020 COVID-driven lows. After bottoming out at $8.90 on March 23, 2020, the stock has risen to its current price of $20.8. The price has gained 12.4% in the last month and 19.6% over the past three months.

Price chart and basic statistics for MFC (Source: Seeking Alpha)

The forward P/E for MFC is a bit lower than for peer firms like Aflac (AFL) and Prudential (PRU), and the yield is an attractive 4.3%. The three- and five-year compound dividend growth rates are 9.49% and 9.78%, respectively. Even with the 20% gain over the past ninety days, the valuation still looks very reasonable.

Trailing quarterly earnings and forward estimates (green values are earnings beat amounts and red values are earnings miss amounts) Source: eTrade

Looking at quarterly earnings, three features are evident. First, the company has delivered remarkably stable quarterly earnings year after year, with the obvious exception of Q1 2020. Second, the analyst outlook is for very modest earnings growth.

Third, although the stock has missed earnings expectations occasionally, the amounts of the misses are very small (again with Q1 2020 being the exception). MFC has a very stable and, therefore, predictable earnings stream. Fundamental valuations are likely to be far more meaningful for this kind of stock than for most others. This, in turn, suggests higher confidence in the analyst-generated outlooks.

Wall Street Analyst Outlook

The consensus opinion of Wall Street analysts is bullish, but the recent gains in MFC's price leave little or no room for further gains in meeting the analysts' twelve-month price target. The consensus price target calculated from Wall Street analysts by eTrade has a twelve-month price target of $21.43, only 3% above the current price.

Wall Street consensus rating and twelve-month price target (Source: eTrade)

The Wall Street consensus compiled by Seeking Alpha is lower than the current price, implying an expected 6% decline in price to be in line with the analyst expectations. The overall consensus rating is bullish but the price has risen so quickly that we have the not-uncommon situation of the dichotomy between an implicitly negative price outlook and a bullish rating.

Wall Street analyst consensus rating and price target (Source: Seeking Alpha)

Given all of the uncertainties associated with price targets, the analyst consensus should be interpreted as indicating that the stock is currently fully priced, although the more qualitative rating (which is bullish) indicates that the analysts see no obvious pitfalls for the firm.

Outlook from the Options Market

Another way to generate an outlook for a stock is to analyze the prices at which options on the stock are trading. The market prices of options provide information about traders' consensus outlook on the probability of the price going above a certain level (call options) or below a certain level (put options) over some period of time (from today until the expiration date of the options).

By aggregating market prices of call and put options with the same expiration date but different payouts (different strike prices), it is possible to employ a mathematical model to calculate the implied probability of all possible future returns. This strategy is well-established in institutional finance. For some background, see the Minneapolis Fed's web pages on their implementation. For a review of the literature on how options prices are useful in generating outlooks in general and with examples using my version of this approach, see this presentation.

The option-implied probabilities of expected price returns are charted as a probability distribution. When I chart the option-implied probability distribution for future return, I rotate the negative side of the distribution about the vertical axis so that the relative probabilities of positive and negative returns are easier to see.

The price outlooks derived from options prices are probabilistic rather than a specific forecast of the future price. The options prices may indicate increased or decreased likelihood of gains or losses and this provides insight into the prevailing beliefs of those buying and selling options.

I have analyzed options expiring on January 21, 2022, to produce an option-implied price return outlook for MFC between now and that date.

Option-implied price return outlook probabilities to January 21, 2022 (Source: author's calculations using options prices from eTrade)

The option-implied return outlook from now until January 21, 2022, is slightly bullish. The single most-probable price returns over this period is 9.5% (see the peak in probability in the chart above). That said, the probabilities of positive and negative returns of the same magnitude are otherwise very similar, which suggests a neutral outlook. For larger-magnitude returns (beyond 30% on the horizontal axis), negative returns are slightly more probable than equal-magnitude positive returns. This is to be expected for dividend-paying stocks which sacrifice upside potential by returning part of earnings to shareholders.

The annualized volatility from the option-implied distribution is 29%, which is on the low end for individual stocks.

Overall, this is a modestly bullish view from the option-implied outlook.

Summary

Manulife has a consistent and, therefore, fairly predictable earnings stream. The current yield is 4.3%, the annualized dividend growth rate is a bit above 9%, and the P/E is 8.94. The stock could certainly get cheaper, but a simple Gordon growth model approach would imply 13% or so in expected total return. The wild card is the potential for changes in P/E, but there is no obvious reason to expect a decrease. The Wall Street analyst consensus is bullish, although the price has risen sufficiently that the current price is in line with the consensus twelve-month price target.

The option-implied outlook for MFC is slightly bullish, with the single most probable price return equal to 9.5% between now and January 21, 2022. Combined with the dividend, this would be a total return of 13.8% or so. The bullishness of the option-implied outlook is tempered by the otherwise neutral features of the return distribution. Given the modest valuation, the bullish analyst outlook, and the slightly bullish option-implied price return outlook, my final rating is bullish.

Analyst’s Disclosure: I am/we are long MFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.