TORONTO — The CEO of Manulife Financial Corp. (TSX:MFC) says the insurance giant is making the right choice by cutting its quarterly dividend in half, despite the fact it reported a 76 per cent surge in profits during the second quarter.
“We were fully aware that reducing our dividend would not be popular in some quarters, but it is exactly what you would expect a financially disciplined company to do under these circumstances,” chief executive Donald Guloien told analysts Thursday on a conference call.
He estimated that the dividend cut will save the firm about $800 million a year.
“Reducing the dividend and retaining more of our earnings is the most economical means of preserving and building capital that will further cushion us from risk, and support growth of all types,” he said.
The unusual move sparked a negative reaction on the Toronto stock market on Thursday as investors pulled Manulife’s shares down 15 per cent, or $3.89, to $22.36.
Earlier in the day, Canada’s largest insurance company reported net income attributed to shareholders of $1.77 billion or $1.09 per share for the quarter ended June 30. That was up from $1.01 billion, or 66 cents per share, a year earlier.
Overall net income was $1.77 billion compared to $998 million a year earlier.
The company attributed the increase to strengthening equity markets, which resulted in non-cash gains of $2.6 billion from investments The gains were offset somewhat by lower corporate bond rates, which cut the investment returns from bonds held in the investment portfolio, and continued weakness in credit markets.
The results ran alongside Manulife’s plans to slash its quarterly dividend by 50 per cent to 13 cents a share from 26 cents to build capital.
Manulife said lower interest rates and other items related to fixed income, or bond, activities resulted in a non-cash charge of $1.1 billion.
The company booked sharp gains in quarterly revenue, which surged to $11.4 billion from $7.6 billion recorded the year before.
Guloien said in an interview that the new dividend of 13 cents per share would allow the company to hold on to a larger percentage of its earnings in anticipation of more difficult economic conditions.
“There’s obviously more storm clouds on the horizon in terms of equity markets and the general economy,” he said.
“The last couple weeks have been quite positive, but our capital planning has to take into account more conservative scenarios than what we’re experiencing at the present time.”
“There’s not a long history of Canadian financial institutions cutting the dividend, and some people think of cash dividends as sacred.”
Manulife faces a higher level of stock exposure than the typical publicly traded company because it deals with segregated funds and variable annuity guaranteed products, which ensure certain level of payout.
The funds are similar to mutual funds but include insurance features such as death benefits as well as promises that at maturity clients will receive no less than a set proportion of their investment.
When markets plunged last year, Manulife had to raise billions in capital to make up for a widening shortfall in the amount it had promised to pay customers decades from now.
Manulife’s stock has endured a tumultuous 12-months on the markets, falling from a high of $39.40 to a dismal low of $9.02 in March.
Guloien addressed the stock plummet made earlier this year, which left the company’s stock hitting its lowest level in nearly a decade.
“Those were very uncomfortable times and we want to put as much distance between us and that possibility — albeit remote — as we possibly can,” he said.
Manulife has since been tweaking its variable annuity products to lower its guarantees, and decrease its risks.
First Asset Investment Management portfolio manager John Stephenson said he was surprised how badly Manulife’s stock was hit on Thursday. Other insurance companies, including Sun Life (TSX:SLF) and Great-West Lifeco (TSX:GWO), also lost ground on the markets.
“If you look at insurance in general, it’s twice as sensitive to equity upside and downside as the banking sector,” he said, noting that the TSX financial sector has weakened, and that insurance companies are a particular laggard.
Stephenson said he owns stock in Manulife, but decided not to sell on the latest developments, instead he has considered buying more of the company’s shares.
“It’s not often you get this, and certainly any time you get it down near $20 it’s a screaming buy,” he said.