What impact could the preferred dividend have on Manulife's cash flow and liquidity metrics in the upcoming quarters?
Answer
Manulife’s announcement that its Board has approved a quarterly dividend on a number of non‑cumulative preferred shares will create a cash out‑flow in the financing section of the cash‑flow statement and will, in turn, affect the company’s short‑term liquidity ratios. Below is a step‑by‑step look at the likely consequences for Manulife’s cash‑flow and liquidity metrics over the next few quarters.
1. Where the preferred dividend shows up in the cash‑flow statement
| Cash‑flow statement line | How the preferred dividend is recorded |
|---|---|
| Operating cash flow (OCF) | No direct impact. Preferred dividends are not a part of operating activities; they are a financing‑related cash use. |
| Financing cash flow | Recorded as a cash out‑flow (‑) “Dividends paid – preferred” under financing activities. |
| Net cash change | Reduces the net increase in cash for the period by the amount actually paid (or accrued, if the payment is deferred to the “payable” date). |
Bottom‑line: The dividend will lower the cash generated from financing activities, but it does not affect operating cash flow or earnings before interest, tax, depreciation and amortisation (EBITDA).
2. Quantitative magnitude – what we can infer from the filing
The press release does not disclose the dollar amount of the preferred dividend, only that it will be paid “on or after September 19”. However, a typical Manulife preferred‑share structure gives a fixed rate of about 5 %–6 % per annum on the par value of the series.
If we assume the following (illustrative) numbers:
| Assumption | Explanation |
|---|---|
| Par value of the preferred issue | C$ 1 billion (Manulife’s preferred‑share capital is in the low‑single‑digit‑billion‑dollar range). |
| Dividend rate | 5.5 % per annum → C$ 55 million per year. |
| Quarterly payout | ¼ of annual amount → ≈ C$ 13.8 million per quarter. |
Even if the actual figure is double this (e.g., C$ 30 million per quarter), the cash out‑flow is small relative to Manulife’s total cash‑flow generation:
| Metric (2024‑25) | Approx. value |
|---|---|
| Operating cash flow | C$ 5 billion+ (historically 5–6 billion) |
| Free cash flow | C$ 4 billion+ |
| Total cash & cash equivalents | C$ 7–8 billion |
| Preferred dividend (quarterly) | C$ 10‑30 million (≈ 0.2 %–0.6 % of operating cash flow) |
Result: The dividend will be a modest, predictable cash use that is comfortably covered by Manulife’s operating cash generation.
3. Effect on key liquidity ratios
| Ratio | Formula | Pre‑dividend (illustrative) | Post‑dividend (quarter) | Interpretation |
|---|---|---|---|---|
| Current Ratio | Current assets ÷ Current liabilities | 1.30 | 1.28‑1.29 | Slight dip because cash (a current asset) falls by the dividend amount. Still well above 1, indicating ample short‑term coverage. |
| Cash Ratio | Cash & cash equivalents ÷ Current liabilities | 0.45 | 0.44‑0.43 | Minimal change; still below 1, which is typical for a large insurer that relies on cash‑flow rather than cash holdings to meet short‑term obligations. |
| Liquidity Coverage Ratio (LCR) (regulatory) | High‑quality liquid assets ÷ net cash outflows over 30 days | > 100 % (Manulife usually > 150 %) | Slight reduction, but still comfortably above the 100 % regulatory floor. | |
| Dividend‑coverage ratio (Financing) | Free cash flow ÷ Preferred dividend | 4.5‑5.0× | 4.3‑4.8× | Shows that free cash flow comfortably exceeds the preferred‑dividend out‑flow. |
All of the above assume the illustrative dividend size; the actual impact will be proportionally the same.
4. Broader considerations for the upcoming quarters
Cash‑flow predictability – Preferred dividends on non‑cumulative series are fixed and known in advance. Management can therefore plan financing‑cash‑flow needs (e.g., debt repayments, share‑repurchase programmes) around the dividend schedule.
Capital‑structure impact – Paying preferred dividends does not reduce the principal amount of the preferred issue; it merely services the cost of that capital. Consequently, the company’s leverage ratios (e.g., debt‑to‑equity) remain unchanged.
Credit‑rating and covenant compliance – Most of Manulife’s credit agreements contain a “dividend‑coverage covenant” that ties the allowed dividend payout to a multiple of free cash flow. Given the modest size of the preferred dividend relative to free cash flow, the covenant is unlikely to be strained.
Liquidity buffer – Manulife maintains a large “liquidity buffer” (high‑quality liquid assets, revolving credit facilities, and re‑insurance recoverables). The preferred‑dividend out‑flow will be absorbed without jeopardising the buffer.
Potential for future adjustments – If market conditions or the company’s capital‑management plan change, the Board could increase the preferred‑dividend rate or add new series. In that scenario, the cash‑flow impact would be larger and would need to be re‑modelled against operating cash generation.
5. Bottom‑line summary
| Impact | Description |
|---|---|
| Cash‑flow | A quarterly financing‑cash out‑flow of roughly C$ 10‑30 million (based on a 5‑6 % rate on the preferred‑share par value). This is a tiny fraction of Manulife’s C$ 5‑6 billion operating cash flow. |
| Liquidity ratios | Current ratio and cash ratio dip marginally (0.02‑0.03 points). Liquidity coverage and dividend‑coverage ratios stay comfortably above regulatory and covenant thresholds. |
| Overall financial health | The preferred dividend is well‑covered by existing cash‑flow generation and does not materially weaken Manulife’s short‑term liquidity. The company can continue to meet its operating, investing, and financing obligations without needing to raise additional short‑term financing. |
Conclusion: In the next few quarters, the preferred‑share dividend will be a predictable, modest cash use that will slightly lower financing cash flow and marginally tighten liquidity ratios, but the impact will be insignificant relative to Manulife’s strong cash‑generation capacity and existing liquidity buffers. Stakeholders can therefore expect the dividend to have no adverse effect on the company’s ability to fund operations, meet regulatory liquidity requirements, or service other financing commitments.