Manulife Financial: Stock Valuation


>Originally written July, 2010

Manulife Financial is North America’s largest and the world’s fourth largest insurance business. Although Manulife Financial’s main operations are located in North America, it controls significant operations in Asia, spanning ten countries there. And while the successful investor values highly Manulife Financial, the common investor currently does not. Manulife Financial, as of July 2010, traded with a historically low P/E of 7.49. The common investor feels that because Manulife Financial did not hedge its segregated funds before the financial crisis, that each stock market correction will effectively hammer it. However, Manulife Financial’s portfolio consists of quality holdings; real estate in Canada, USA and Asia totalling $6 billion, stock’s totalling $5.3 billion, and money market funds and bonds totalling billions. Finally, even as Manulife Financial increasingly hedges its segregated funds, targeting a 70% hedge by 2012, common investor sentiment is “too little too late”. However, by comparing Manulife Financial’s underlying business to that of Great-West Life Co, another Canadian insurance business, one should conclude Manulife Financial’s stock is grossly undervalued.

First, Manulife Financial’s $29 billion book value is higher than its $28 billion market capitalization. Evidently, the successful investor can buy a piece of Manulife Financial for no premium. Second, Manulife Financial’s cash holdings and investments are substantial. Manulife Financial’s management is clearly maximizing its float – the money it receives from policy holders that is then invested or held in cash holdings. And overall, Great-West Lifeco’s fundamentals pale in comparison to those of Manulife Financial. However, Great-West Lifeco’s market capitalization falls only $4 billion short of that of Manulife’s. Further, because Manulife Financial is not trading with a premium, the successful investor would unlock its cash value. As of 2010, Manulife Financial held $19 billion in cash holdings, which comprised 68% of its market capitalization and 66% of its book value. However, before unlocking Manulife Financials cash value, the successful investor would take into account its $6 billion in long term debt. The equation to unlock Manulife’s cash value helps valuate Manulife Financial’s real stock price:

Manulife Financial’s real stock price = actual stock price [$15] + (cash per share [$10.8] – long term debt per share [$3.52])

Finally, the equation delivers Manulife’s real stock price, $22.28, an increase of 49% over its actual $15 stock price.


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