Thursday, August 6, 2009

crisis takes it's toll on Manulife's dividend

The credit crisis has taken it's toll on the dividend of Canadian-based insurance giant Manulife Financial (MFC). Manulife's decision to cut its dividend by 50% to $0.13/share is part of an effort to build a strong capital position for what is sounds like are future acquisitions.

The CEO made the following statement today:
While we recognize the importance of the 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. We believe that companies that build fortress levels of capital will benefit their policyholders and shareholders and be recognized favourably by regulators and ratings agencies."

This move was mildly expected, however I believe it will still come as a shock to many dividend investors, as Manulife has long been viewed as a stalwart on the Canadian and global financial scene.

7 comments:

Frog of Finance said...

At least the company is coherent in its moves. Minutes after annoucing the dividend cut to conserve capital, it also announced a 3% discount on reinvested dividends under its DRiP.

Thicken My Wallet said...

I thought about your blog when I read the announcement.

What's more interesting is that they announced they are revisiting their assumptions about expected stock market return. Given they are exposed (and unhedged) on their variable annuities, it says a lot about future expectation of equity returns (or the new CEO is acting like an accountant as per his training). You only need a large capital reserve cushion if you think returns will be below previous expectations.

stocks10111 said...

Frog of Finance said...
At least the company is coherent in its moves. Minutes after annoucing the dividend cut to conserve capital, it also announced a 3% discount on reinvested dividends under its DRiP.
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If you do your research the discount of 2-3% of reinvested dividends under their DRIP was introduced in MAY so it sucks because some investors got in to the drip in may thinking it was a bargain not knowing this was coming. IMO the company is a sell at the moment.

Anonymous said...

I sold this morning. I am sticking to my stock choosing criteria, I will only buy or keep a stock with a lower than 3% yield if it has a history of consistent dividend increases. After this 50% dividend cut, manulife falls out of my criteria. This may be a mistake given the company reported good earnings, but you don't have to look far for other good yield opportunities.

Anonymous said...

I don't think MFC's loss is directly attributable to the credit crisis. By choosing not to hedge some of their financial products, they placed a large bet on equities NOT going down. They obviously lost that bet. Their problems are self-inflicted.

MG (moneygardener) said...

But why is it that equities went down so far?

Anonymous said...

Had they been hedging, MFC's losses incurred from their guaranteed products would have been minimal (at least much smaller). For these products, they should have been indifferent to equities falling--they would have been hedged.

To be fair, counterparty risk on the hedges would still have been an issue. But, they would have been (way) better off.

There is certainly a link to equities falling and the credit crises. And, the credit crises should certainly have affected insurance companies. My point though, is that it should not have been nearly as bad as it was at MFC.

Furthermore, how much of the pre-crises profits were real? Sure, they are bringing in lots of fees by selling these products. But some of these fees should have been spent on hedging. They were selling put options to their clients and put options are not free.