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Adventures in DRIPping
Manulife! What Were You Thinking!

Robert D. Gibb

What with computers blowing up (I swear if I ever meet Bill Gates I’m gonna smack him one. “Bill, what were you thinking?”) followed by food poisoning it’s been awhile between columns. There is much to talk about.

The last column reported the announcement by Manulife Financial (TSX:MFC) of the introduction of a dividend reinvestment plan (DRIP) with an accompanying stock purchase plan (SPP) feature. This generated great excitement within the DRIPping community. Hundreds of small investors were ready to rush out and buy single shares and/or organize group purchases to establish DRIPs. Some did buy single shares. At the Drip Investing Resource Center or DIRC (http://dripinvesting.org) people were cautioned against this until Manulife’s plan particulars were known. People who waited are happy they did.

Manulife’s own website proclaimed:

As a shareholder of Manulife Financial Corporation you can now enroll in a convenient, low cost plan to have the dividends paid on your Manulife common shares automatically reinvested in additional Manulife shares or to further increase ownership of Manulife common stock by buying more shares.
By enrolling in the Canadian Dividend Reinvestment and Share Purchase Plan (“DRIP”) or the Direct Share Purchase Plan for US Shareholders (“DSPP”) you will be able to:

  • Have your MFC common share dividend automatically reinvested
  • Buy more shares of MFC
  • Sell your program shares
  • Have easy access to your account through 24/7 online access
  • Cancel at anytime
  • Choose only the services you want

All at a reasonable cost...

When details were finally made known DRIPpers jaws dropped (and we all know how painful that can be).

$15 per optional cash payment (OCP) plus fees to reinvest dividends.

While announcing their “low cost plan” Manulife entered the DRIP universe as the only Canadian DRIP I’m aware of to charge fees and the highest priced commonly available plan on the planet. Worse, this great Canadian company only charges US investors $5 per OCP by cheque or $2 per OCP if the shareowner registers for a monthly automatic bank withdrawal (ABW). In the US ABWs are known as ACH or automatic clearing house. Manulife cites economies of scale as the reason for the differing fee structure between Canadian and American shareowners. Attempting to bypass the Canadian fees Canadians attempting to register online for the US plan will face two problems: the requirement of a US address and a bank account that is recognized by the US banking system. Regular Canadian $US accounts used for US DRIPs will not work for US-based automatic bank withdrawals.

We’ve all heard of dual-class shares, however, the Manulife DRIP has in effect created dual-class shareowners. While it is my understanding Manulife has as many Canadian share owners as American the Americans are clearly favoured within this plan. As one poster at DIRC commented, it’s as if MFC got tired of shareholders asking for a DRIP so they created one designed to fail. “We gave shareholders a DRIP. Nobody used it so we cancelled it.”

According to one national newspaper Manulife’s research showed only 30% of shareholders would make use of the plan so it was decided to pass the costs on to registrants. With such onerous fees 30% registration seems optimistic. Since the announcement not one poster at DIRC has indicated they have purchased shares with the intention of registering in the DRIP.

Now, another Canadian insurer, Sun Life Financial Inc. (TSX, NYSE:SLF) has announced the introduction of a DRIP plus SPP.

"We are pleased to add a convenient means of reinvesting dividends and purchasing shares to our services for common shareholders," said Donald A. Stewart, Chief Executive Officer.

Sun Life Financial will engage CIBC Mellon Trust Company, its transfer agent, as plan administrator for the DRIP. Enrolment details are expected to be available when the October 2006 dividend is distributed. Further details about the DRIP will be posted to the Company's website as they become available. The DRIP, which will be a participant pay plan, will initially be available to common shareholders who reside in Canada. The company is working with its transfer agent with a view to establishing a Dividend Reinvestment Plan for shareholders who reside in the United States."

I decided to contact Sun Life in regards to possible fees. According to their representative the difficulty is that the de-mutualization of insurance companies is a recent development in Canada. Also, the vast majority of ownership resides with large institutional investors who apparently are not interested in subsidizing the costs of a plan for the benefit of minority shareholders.

If I was a small Canadian investor wanting to start an insurance DRIP I’d be looking south of the border. Here are some reasons:

  1. At $15 it requires a $750 contribution to get to a 2% commission or $1,500 for a 1% commission through MFC’s plan.
  2. Our dollar is currently high against the US dollar.
  3. There are plenty of no or low fee US insurance and money management DRIPs.
  4. Banks typically skim around 1.2% when converting the dollar. Even counting the stamp it’s possible to get to a 2% commission on a $100 Canadian OCP and 1% on a $200 Canadian OCP.

Here are three no fee US insurance companies DRIPs that also allow foreign investors:

Aflac (NYSE:AFL). Yes, this is the company with the duck. AFLAC’s main business is supplemental health and life insurance marketed and administered primarily through its subsidiary, American Family Life Assurance Company of Columbus.

Alfa Corp (NSDQ:ALFA). Alfa Corporation is a financial services holding company which operates predominantly in the insurance industry through its many wholly-owned subsidiaries.

United Fire & Casualty Company (NSDQ:UFCS). United Fire & Casualty Company is engaged in the business of writing property, casualty and life insurance. UFCS was added to the S&P 600 small cap index in 2005.

None of the above are recommendations. Rather they are just meant to be alternatives for DRIPpers willing to look further a field. Combined the annual revenue of these three companies is less than half that of Manulife’s. AFLAC is the blue-chip of the three and accounts for about ninety-percent of the total revenue. United Fire & Casualty appears to be going through a particularly bad period with earnings dropping from $3.68 per share in 2004 to $0.41 per share in 2005. I’m going to guess last year’s hurricane season is to blame. Do your own due diligence.

Numbers, Numbers, Numbers

One of my favourite investing books is “Stop Buying Mutual Funds” by Mark J. Heinzl (1999). I’ve always remembered how the book showed $10,000 invested for 30 years at 10% per year (the long term average of the TSX) grew to almost $175,000. Placed in a mutual fund earning 10% per year and charging the average at the time management expense ratio (MER) of 2.1% the investor received $98,000 after 30 years. While the mutual fund investor earned $88,000 profit ($98,000 less $10,000) that seemingly small 2.1% MER earned the fund company $77,000 or almost as much as the investor. Note: the average Canadian equity mutual fund MER is now estimated at 2.6% or almost 25% higher than 1999.

DRIPs are about paying management fees to ourselves. I decided to apply a little of Mr. Heinzl’s thinking and conducted a quick poll at dripinvesting.org where we maintain a share exchange message board.

Twenty-two respondents indicated they’d conducted a total of 528 share exchanges for an average of 24 exchanges per person. This is entirely a reasonable number as we’ve conducted many group purchases at dripinvesting.org (17 in one group alone). The average cost of a single share purchase and removal from street name is around $85. With 528 transfers that is 528 x $85 = $44,880 in saved commissions. How would those savings grow if invested over 30 years at 10% per year?

$44,880 @ 10% over 30 years = $783,129.00

While exchangers at dripinvesting.org saved $44,880 on commissions immediately the long-term growth potential is outstanding. That’s more than three-quarters of a million dollars in the pockets of the investors on these 528 transfers alone. Note: there is nothing to guarantee a 10% return per year but experience shows many DRIPpers achieving or bettering that return,

Another interesting set of numbers to look at are the recent dividend increases from the banks. The combined dividend increases from the four banks with DRIP plus SPPs in the recent quarter was 32.23% for an average of 8.05%. With the government telling us inflation is running around 3% these dividend increases are more than double the rate of inflation. Over time, as the dividend increases the share price should rise concurrently. Unlike most bonds, which generally match inflation, the purchasing power of the tax-advantaged dividend yield is increasing all the while the underlying security is increasing in value creating a potential tax-advantaged capital gain.

Next Column

Next column is going to look at some actions individuals and shareclubs can take to encourage more Canadian companies to offer DRIPs with share purchase plans. We’ll also look at some of the recently established on-line deep discount brokers catering to frequent traders to see if they are applicable to DRIPping.

A Final Note

Don’t eat anything from the deli-section that comes with a yogurt dip that’s been sitting on a warm shelf all day. Trust me! Oh! And if you see Bill Gates ask him what he was thinking for me will you. ;-)

Robert Gibb, 401-2910 Cook Street, Victoria, BC, V8T 3S7 (250) 383-7075 [email protected] Robert Gibb is a retired school teacher. He gives seminars on dividend reinvestment plans. Mr. Gibb is a frequent contributor to Internet DRIP boards under the nickname OperaBob.