Friday, March 17, 2006

The Manulife DRIP Plan

Unlike in the US, where there are over 1800 companies that offer Dividend Re-Investment Plans (DRIPs) and related Optional Cash Purchase (OCP) plans, the number in Canada has arguably flat lined or is on a decline. Due to mergers and acquisitions Canadian DRIP investors have recently seen plans for Terasen (formerly B.C. Gas) and Dofasco effectively end.

And so it was with great anticipation (and dare I say excitement) that the DRIP community eagerly awaited details of the Manulife DRIP plan, due out months following an original announcement late last year. Manulife has shown tremendous growth with solid financials, has initiated a global expansion, and is quite literally flush with cash.

Needless to say, once the details were announced yesterday, there was a collective sigh of disappointment. Here are the areas of the plan that are so troubling:
Optional Cash Purchase Fee: $15
Dividend Re-Investment Fee: 5% to a maximum of 6$
Share Sale Fee: $20 + $0.06/share
The fee structure runs contrary to one of the fundamental reasons I personally have really come to value DRIPs. Not only are fees alien to the exceeding majority of Canadian plans, some actually offer discounts on the share price for reinvestment. Also, charging investors a fee to reinvest their dividends into the distributing company is a little shaky morally. From an investor’s perspective, this is comparatively the worst DRIP plan in North America. Too bad.

(Note: Compared to the DRIP, buying Manulife would even be significantly cheaper via Canadian ShareOwner – i.e. CSO would only charge $9.00 for a purchase, dividend reinvestment is free, and a sale costs $15 + 3¢ per share.)

8 Comments:

Anonymous Average Joe said...

This is very, very disappointing news. That is an absolutely terrible fee structure. I have been away on vacation for the last week, and coming back to this news is depressing.

There must be a lot of discussion (and complaining) over at dripinvesting.org. Hopefully they will try and organize a letter writing campaign so that we can all complain about this terrible plan.

Looks like we will have to DRIP companies from the US if we want exposure to the insurance industry. I believe that AFLAC has a fee free drip program.

3/19/2006 5:48 PM  
Blogger Humble Investor said...

Hi AJ,

Welcome back - hope you had a good break. I'm sure there will be a few letters written but I'm sure of the effect it will have. I'll look at MFC as a possible lump sum candidate via my Canadian ShareOwner account. I just hope this isn't the trend for future plans.

3/19/2006 5:52 PM  
Blogger Rubun said...

I would love to ride on MFC with DRIP as well. This sure is disappointing...to my knowledge I have never heard of a DRIP plan where you have to pay to get your dividend re-invested.

Since they are loaded with cash, I guess they are not so eager to attract more capital via DRIP plan.
Nonetheless MFC's outlook is very promising and I will continue to add on my existing position (via InteractiveBroker).

3/23/2006 4:24 PM  
Blogger beckalodeon said...

I disagree. I'm an MFC shareholder, and I DRIP (for free) through my brokerage account. Why should the majority of shareholders who have such plans subsidize the minority who go with the company plan?

It's rather baffling to me why a 'frugal' investor would demand that a company they invest in waste money on such administration.

As for 'shaky morality', give me a break. Read some insurance law cases at your local law library and you'll soon find that initiating a fee-based DRIP is rather low on the list of nasty things that insurers do.

The bottom line is that it's rational for a company to charge for administrative services - it's not a charity. Would you expect MFC to discount premiums just to be nice? Not if you want your MFC ROI to continue rising.

4/03/2006 4:01 PM  
Blogger Humble Investor said...

Hi Beckalodeon,

The rationality of charging fees to cover administrative costs is clearly understood. However, even fee-free plans make companies money - i.e. through the float (interest) gains on uncommitted investments. Many DRiP investors send cheques, for example, dated on the first of the month with purchases occurring on the 15th. In most material its clearly stated these gains are used to defray plan costs.

While fees for US plans are not uncommon, the MFC plan is by far the most expensive in Canada. Other companies have chosen, as a business decision I'm sure Manulife also weighed, to forego fees for DRiP investors. Why would this be? I do not believe this to be a wasted investment. Float benefits aside, (anecdotally) DRiP investors are loyal, long-term holders, moderating some of the volatility created by short(er) term players.

It may also be worth asking what then, was Manulife's intention in creating the most expensive plan in Canada? Clearly, they spent a significant amount of money in researching and establishing the plan, preparing collateral, PR, etc. If their subscription rate falls below expectations (i.e. because investors realize a better deal can be had via a Canadian ShareOwner account) would that also not be seen an unfortunate waste?

4/03/2006 5:18 PM  
Blogger beckalodeon said...

Hi HI -

An interesting response, and I appreciate your taking the time to provide such a considered reply. Let's go through your thoughts.

Float:

Since you're apparently guessing on this, I'll also do some guessing; the float value of the DRIP would be negligible to MFC vis-a-vis its 'real' float.

DRIP investors are loyal shareholders:

So what? This is a (tenuous) value judgment, not a great reason for a company to set up a free DRIP. As a long-term investor, I try to accept and take full advantage of volatility. Neither the market nor the company - no matter what it might say as a tagline in its conference calls - cares how long you hold the stock, or whether you're panicky or euphoric. In fact, I would argue that really stupid short-term behaviour actually benefits long-term shareholders because MFC has a strong history of stepping in and buying its shares when they are a bargain.

Subscription rate and waste:

I think we both know that MFC didn't really want to set up a DRIP. The company has stated clearly in the past that it's an administrative sinkhole, and they don't require yet more excess capital. Given this, I highly doubt that the company is worried that the subscription rate will fall below their expectations. Instead, I would think it's hoping that as few shareholders as possible sign on. BTW, while the cost of collateral, research, etc., is static (fixed in this case more or less up-front), the ongoing costs of DRIP administration are the killer.

========
OK, that's enough on that. Believe me, there are very few investors out there who are more cost-conscious than I. The flip side of that coin is that I want the companies I hold to have that same sense of frugality and fairness (and it's defining the latter that's causing the disagreement here, n'est pas?).

As you intimate, the DRIP types are likely rational, and - after the Sturm und Drang subsides - will sign up with Canadian ShareOwner.

- beck

4/03/2006 6:40 PM  
Blogger Humble Investor said...

Hi Beck,

Well rebutted.

Your 'sturm und drang' comment is interesting. I first interpreted that that just to the MFC plan, but I realize your comments could be interpreted to DRiPs in general.

If the latter, the optimist in me disagrees, though at the rate new Canadian DRiPs are growing/shrinking, and at the risk that new plans may be modelled after the MFC plan (i.e. SLF) it doesn't look promising. However, while there are still $0 fee (or discounted) plans, I'm sure there will be holdouts for some time.

Thanks again for your thoughts.

4/03/2006 9:46 PM  
Blogger beckalodeon said...

Yeah, I meant just the MFC plan, but your comments were interesting.

As it happens, I received my 2005 MFC Proxy Circular and Annual Report yesterday. God bless the company for its choice of really cheap paper.

4/04/2006 11:12 AM  

Post a Comment

<< Home

--------------------------
Disclaimer: These articles are for information only, and are not to be construed as financial advice, legal advice, or a solicitation to buy or sell securities.