...(F)irst ...you have to believe the (stock) markets aren't going to crash again
Quote from Globe article below:
"I have to take a leap of faith, as I do with bank shares. As most of us do, I would argue, on the basis that their prodigious profitability will paper over all sorts of mistakes. Which has been true - so far. "
snip and re-order slightly
There are a couple of caveats. The first, obviously, is that you have to believe the markets aren't going to crash again and wallop ... (everybody& everything) ...with more losses from those guaranteed products.
The second, and this is a little embarrassing frankly, is that I don't really understand exactly what ...(this and therefore all financial institutions) ... does - I mean in detail. I can't fully understand the annual report. (you're not alone ... except in admitting it) It's so full of jargon and financial engineering that I challenge anyone but the most knowledgeable of industry insiders to truly understand what it all means.
November 20, 2009
A beaten-up Manulife looks awfully tempting
By Fabrice Taylor
From Friday's Globe and Mail
The selloff seems harsh: Manulife can now absorb greater shocks, and its returns to shareholders are generous
Fabrice Taylor is a chartered financial analyst.
A Manulife investor ran into one of the insurer's investment bankers yesterday. "Why do companies sell shares low? Aren't they supposed to sell them when they're high?
"
The answer: "Sometimes we want investors to make money, too."
That's a true story, but is it true that investors (I don't mean existing Manulife investors, I mean those who bought shares after they fell, as I did) got a gift from the market? I suspect so.
My argument isn't very technical. It's also got a couple of important caveats. But here goes: The first point worth making is that the market often overreacts to extreme news, both good and bad. Two years ago, when Manulife was cranking out huge profits and earning high returns on equity, the stock was $41. Yet it was about that time that the company was maximizing the risks that would sink it a year later. Investors were so focused on the good news they didn't bother to look for the bad.
It stands to reason that the opposite might be happening now, particularly because the company has lost credibility with this surprise share issuance. The stock's selloff seems harsh.
While it's true that investors, and analysts, are worried that this means there's more dilution to come, I'm not so sure. This is the second point: If you were CEO Donald Guloien, you would presumably raise enough capital to ensure you won't do it again. He's already got egg on his face; he doesn't want any more. And while it's true that there have been a number of about-faces at Manulife, I think the magnitude of this raise, especially with respect to how far the insurer's capital now exceeds requirements, says they think this is it.
It's also worth noting that capital requirements for insurers are heading up, although no one knows to where. Good reason to sell shares when the market is open to buying them.
The upshot of this share issue is that Manulife should be able to absorb more losses from guaranteed products it sold (i.e. stock market-linked investments that insured against a fall in stock prices), should markets tumble again, or make acquisitions if markets hold or rise. Or both.
Which brings me to point No. 3: Manulife has probably the best Western insurance franchise in Asia after AIG. It's also one of the top franchises in the United States, through John Hancock. And in Canada it's part of a small oligopoly, making great profits. AIG, now owned by the U.S. government, is for sale and Manulife now has the opportunity, platform and funds to make a play for the parts that would fit. That's a once-in-a-lifetime opportunity. Bulking up in Asia, and maybe in the U.S., would be good for shareholders.
Finally, look at the big picture: From 2001 to 2007, Manulife's return on shareholders' equity averaged 16 per cent with little deviation. Generally, it was on an upward trajectory, especially after digesting John Hancock.
I peg Manulife's book value at about $16 a share, so the stock is slightly ahead of that - about 1.18 times.
But if it can make some useful acquisitions and get its ROE back to say 15 per cent, buying the equity at this price still means a healthy double-digit return (almost 13 per cent and rising) over time, in theory.
There are a couple of caveats. The first, obviously, is that you have to believe the markets aren't going to crash again and wallop Manulife with more losses from those guaranteed products.
The second, and this is a little embarrassing frankly, is that I don't really understand exactly what Manulife does - I mean in detail. I can't fully understand the annual report. It's so full of jargon and financial engineering that I challenge anyone but the most knowledgeable of industry insiders to truly understand what it all means.
I have to take a leap of faith, as I do with bank shares. As most of us do, I would argue, on the basis that their prodigious profitability will paper over all sorts of mistakes. Which has been true - so far.
*****
An entry point?
Manulife shares fell 6 per cent Thursday, but the insurer has a long history of generating double-digit return on equity.
Yesterday's close
$18.95, down $1.23
SOURCES THOMSON DATASTREAM, THE COMPANY
"I have to take a leap of faith, as I do with bank shares. As most of us do, I would argue, on the basis that their prodigious profitability will paper over all sorts of mistakes. Which has been true - so far. "
snip and re-order slightly
There are a couple of caveats. The first, obviously, is that you have to believe the markets aren't going to crash again and wallop ... (everybody& everything) ...with more losses from those guaranteed products.
The second, and this is a little embarrassing frankly, is that I don't really understand exactly what ...(this and therefore all financial institutions) ... does - I mean in detail. I can't fully understand the annual report. (you're not alone ... except in admitting it) It's so full of jargon and financial engineering that I challenge anyone but the most knowledgeable of industry insiders to truly understand what it all means.
November 20, 2009
A beaten-up Manulife looks awfully tempting
By Fabrice Taylor
From Friday's Globe and Mail
The selloff seems harsh: Manulife can now absorb greater shocks, and its returns to shareholders are generous
Fabrice Taylor is a chartered financial analyst.
A Manulife investor ran into one of the insurer's investment bankers yesterday. "Why do companies sell shares low? Aren't they supposed to sell them when they're high?
"
The answer: "Sometimes we want investors to make money, too."
That's a true story, but is it true that investors (I don't mean existing Manulife investors, I mean those who bought shares after they fell, as I did) got a gift from the market? I suspect so.
My argument isn't very technical. It's also got a couple of important caveats. But here goes: The first point worth making is that the market often overreacts to extreme news, both good and bad. Two years ago, when Manulife was cranking out huge profits and earning high returns on equity, the stock was $41. Yet it was about that time that the company was maximizing the risks that would sink it a year later. Investors were so focused on the good news they didn't bother to look for the bad.
It stands to reason that the opposite might be happening now, particularly because the company has lost credibility with this surprise share issuance. The stock's selloff seems harsh.
While it's true that investors, and analysts, are worried that this means there's more dilution to come, I'm not so sure. This is the second point: If you were CEO Donald Guloien, you would presumably raise enough capital to ensure you won't do it again. He's already got egg on his face; he doesn't want any more. And while it's true that there have been a number of about-faces at Manulife, I think the magnitude of this raise, especially with respect to how far the insurer's capital now exceeds requirements, says they think this is it.
It's also worth noting that capital requirements for insurers are heading up, although no one knows to where. Good reason to sell shares when the market is open to buying them.
The upshot of this share issue is that Manulife should be able to absorb more losses from guaranteed products it sold (i.e. stock market-linked investments that insured against a fall in stock prices), should markets tumble again, or make acquisitions if markets hold or rise. Or both.
Which brings me to point No. 3: Manulife has probably the best Western insurance franchise in Asia after AIG. It's also one of the top franchises in the United States, through John Hancock. And in Canada it's part of a small oligopoly, making great profits. AIG, now owned by the U.S. government, is for sale and Manulife now has the opportunity, platform and funds to make a play for the parts that would fit. That's a once-in-a-lifetime opportunity. Bulking up in Asia, and maybe in the U.S., would be good for shareholders.
Finally, look at the big picture: From 2001 to 2007, Manulife's return on shareholders' equity averaged 16 per cent with little deviation. Generally, it was on an upward trajectory, especially after digesting John Hancock.
I peg Manulife's book value at about $16 a share, so the stock is slightly ahead of that - about 1.18 times.
But if it can make some useful acquisitions and get its ROE back to say 15 per cent, buying the equity at this price still means a healthy double-digit return (almost 13 per cent and rising) over time, in theory.
There are a couple of caveats. The first, obviously, is that you have to believe the markets aren't going to crash again and wallop Manulife with more losses from those guaranteed products.
The second, and this is a little embarrassing frankly, is that I don't really understand exactly what Manulife does - I mean in detail. I can't fully understand the annual report. It's so full of jargon and financial engineering that I challenge anyone but the most knowledgeable of industry insiders to truly understand what it all means.
I have to take a leap of faith, as I do with bank shares. As most of us do, I would argue, on the basis that their prodigious profitability will paper over all sorts of mistakes. Which has been true - so far.
*****
An entry point?
Manulife shares fell 6 per cent Thursday, but the insurer has a long history of generating double-digit return on equity.
Yesterday's close
$18.95, down $1.23
SOURCES THOMSON DATASTREAM, THE COMPANY
posted by Walk a Kb or Two in my cassins | 8:38 am
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