Making stock picks is never easy, but we are now ready to make another one. Manulife has been in the news for the past few weeks, mainly for negative reasons. On August 6th, it took markets by surprise by announcing a 50% cut to its quarterly dividend, from .26$ to .13$, starting with this year’s September 21st dividend. It is a surprise in the sense that few had expected such a drastic measure. Most investors are aware that Manulife, like many other insurance companies, has been hit very hard by the recent financial crisis. This move will save the company $800 million, in order to recover its historical stability from what has now become a vulnerable financial situation. Naturally, investors did not appreciate the move and the stock price dropped very quickly. This might be an opportunity to get a solid stock at a decent price, for many investors. While in the past we have warned about investing in financials, we believe they are now back on the right track.
Manulife's CEO said: "While we recognize the importance of a cash dividend to many of our common shareholders, we believe that retaining more of our earnings is the most effective means of building capital while still providing an attractive yield for our shareholders who will benefit as we deploy our capital for growth." Most companies would deliver a similar message when dropping their dividend but I do believe that the more positive news is that Manulife did not wait too long to make this move. The company's stock is down 42% over 2 years because of bad hedging decisions that have been very costly.
Big buys, like Jarislowsky Fraser (who holds 49.5 million shares), have already confirmed they would be buying more shares as they deem the drop as exaggerated. "I don't like dividend cuts, but it was the prudent thing". One question, of course, is if you'd prefer investing in an insurance company like Manulife that has already dropped its dividend yield or perhaps take a chance on the banks. They continue to do their best to keep up their dividend yields yet it is still unclear if they will be able to do so.
Personally, I'd go ahead and buy Manulife, the stock seems poised to recover, eventually. Even now, its dividend yield of about 2,4% is not bad considering the current market. For the next 12 months, the estimated earnings per share are 1.244 (according to Bloomberg) so even its current valuation should warrant a purchase of the stock.
What do you think? Agree with the purchase of MFC with a medium to long term time objective?
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