Manulife’s 2008/9 Decisions Ensured No Investor Appetite…Until Now

Manulife Financial’s stock has had its ups and downs since the initial public offering (“IPO”) in 1999.

Everything was going well during its first decade as a public company. After acquiring Confederation Life and North American Life in the mid-1990s, Manulife then bought Boston-based John Hancock Financial Services for $15 billion in 2004. At the time, it was the largest cross-border transaction by any Canadian company in history. In 2004, its well-respected CEO Dominic D’Alessandro even made a run at CIBC. It didn’t succeed, but he sure tried. At one point, only the Royal Bank earned more in profits than did Manulife.

Between its IPO in 1999 and early August 2009, an investment in the stock delivered a +13.9% compounded annual return (including dividends). That even includes October 2008 when the stock fell 37% amid turmoil in the financial market.

And then came August 6, 2009.

Manulife slashed their dividend by 50%, causing the stock to drop by 15% to $22.36 in a single trading session. The 3-month-old CEO, Don Guloien, explained to angry shareholders that the drastic step was needed to create a “fortress balance sheet.” Then there was a dilutive equity issuance a few months later in November 2009 for $2.5 billion, the biggest in Canadian history at the time. This followed a $2.275-billion equity issuance only 11 months earlier.

It was the worst time to do all this because equity markets had bottomed in early March 2008. However, Canada’s Office of the Superintendent of Financial Institutions (OSFI) was at their front door knocking (or pounding) and wanted action to be taken to improve the balance sheet.

Heading into the 2008 financial crisis, Manulife was almost entirely unhedged to any drop in equity prices. Because insurance companies need to “match” their asset returns with future payment obligations to the policyholders, hedging is considered a prudent thing to do. Then came the financial crisis, which saw a 50% collapse in the equity market, and the losses were a nightmare.

This stock has been in the doghouse ever since 2009. The day before its dividend was cut, the stock traded at $26.25. Since then, the price hasn’t been able to break above $26-27.

Until now.

Late last year, Manulife announced a very large reinsurance contract that removes a lot of uncertainty surrounding its long-term care obligations. The market noticed and the stock appreciated, finally breaking above its historical $27 ceiling. Today, the stock trades over $32.

On July 22, 2022, Manulife Financial was our very first block trade purchase for clients. We purchased shares at $22.36. Since then, we’ve received $2.52/share in dividends, generating a total return of just about 60% for clients.

The company has long achieved their “fortress balance sheet” and its angry shareholders from 2009 should now have a second look. The dividend has not only been fully restored (it’s now $0.40/share each quarter, well above the $0.26/share before August 2009), but the stock is cheap. In 2007, the stock commanded a valuation of twice its book value – today it trades right at book value.

We will continue to hold the stock. Our contrarian philosophy has paid off.