Manulife Financial (MFC) provides financial products and services in Asia, Canada, the United States, and internationally. Last week, dividend growth investors finally received the news they’ve all been waiting for – the Office of the Superintendent of Financial Institutions (OSFI) finally lifted the cap on dividend raises.
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This bodes well for those in the financial industry like Manulife, which subsequently announced a top-up to their December dividend. I am quite bullish on MFC given the current valuations. (See Analysts’ Top Stocks on TipRanks)
Dividend Freeze Lifted
The OSFI is an independent agency formed by the Canadian Federal Government that has oversight over financial institutions. It provides the regulatory framework for deposit-taking institutions like banks, trusts, and loan companies and insurers, such as life and property and casual companies.
At the onset of the pandemic, the OSFI put a cap on dividend raises and buybacks as a cautionary measure. However, as the year passed it was clear that the financial institutions were on solid financial footing. Despite this, the OSFI took their time and as a result, financial companies were starting to build significant cash balances.
It was not a matter of if, but when the OSFI was going to lift the dividend freeze. That came late last week as the OSFI released a statement that included the following:
Beginning today, institutions may again increase regular dividends and executive compensation. Additionally, subject to the existing requirement for Superintendent approval, they may once again repurchase shares.
18% Dividend Raise
With the freeze lifted, Manulife wasted no time. On Friday, the company declared an additional $0.05 per share dividend for December. The additional dividend reflects an 18% increase over the previous dividend of $0.28 per share.
However, the release did confuse some dividend investors. Is it only a one-time dividend? Or is the dividend raise a permanent one. It’s the latter, and here’s why.
Manulife already declared its dividend for December and as a result, was not in a position to re-declare the same dividend. This is why the $0.05 per share was announced as a special dividend for December.
However, in the company press release, Manulife did make it clear that this was going to be their annual dividend raise. It was just announced a quarter earlier than anticipated.
“Manulife has a strong track record of delivering progressive dividend increases and is pleased to have combined the annual increase for 2021 with an accelerated annual dividend increase for 2022 by executing it one quarter earlier than the dividend increases we have announced in the past.”
This also means that investors are unlikely to get another raise next quarter. The 18% raise combines both the Fiscal 2021 and Fiscal 2022 raises. Manulife is likely to announce the next annual raise along with Q4 of Fiscal 2022, which will come in early 2023. The fourth quarter is typically when Manulife announces its annual dividend raises.
On top of the raise, Manulife also announced its intention to launch a Normal Course Issuer Bid (NCIB). Under the NCIB, the company intends to repurchase up to purchase for cancellation of up to 39 million of its common share. This represents approximately 2% of the company’s float.
Strong Q3 Results
The news comes on the back of a quarter in which Manulife posted results that were in line with expectations. While core earnings per share of $0.76 missed by a penny, net business value increased by 22% over Q3 of Fiscal 2020.
The biggest headwind facing the company last quarter took place in the Asia segment. As COVID-19 cases were on the rise, additional lockdown measures in Asia hampered results.
The good news is that this is still very much an area of high growth for the company, and these are temporary headwinds.
As of writing, Manulife remains one of the cheapest insurers in the industry. It is trading at only 7.2 times earnings and 0.97 times book value which are the lowest values among any of its major competitors.
Wall Street’s Take
From Wall Street analysts, Manulife Financial earns a Moderate Buy consensus rating based on four Buy ratings and two Hold ratings. The average Manulife price target of $27.05 implies 36.2% upside potential.
Disclosure: At the time of publication, Mat Litalien owned shares of Manulife Financial (MFC).
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