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Is Manulife Financial Corp. a Buy for its 4.2% Yield?

At under $18, Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) is trading at a price-to-earnings ratio (P/E) of 10.3 and is undervalued by about 18% according to its normal P/E of 12.5.

The business

Manulife offers financial advice, insurance, and wealth and asset management solutions for individuals, groups, and institutions.

The company is an international firm that operates as John Hancock in the United States and Manulife in other countries, including Canada, China, Japan, and nine Asian countries and territories, where it is expected to grow faster, including Cambodia, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan, Thailand, and Vietnam. In fact, it has operated in Asia, Canada, and the United States for more than a century!

Manulife’s earnings were well diversified across United States (37% of earnings), Asia (32%), and Canada (31%) in 2015. Last year, with the efforts of its 34,000 employees, 63,000 agents, and thousands of distribution partners, Manulife’s insurance sales increased by 24%. Around the globe, Manulife serves 20 million customers. Additionally, it had $935 billion in assets under management and administration.

Dividend

Manulife yields almost 4.2%. It has increased its dividend for two consecutive years. The company last increased its quarterly dividend in the first quarter by 8.8% to 18.5 cents. Using its 2015 earnings and current dividend, Manulife’s payout ratio is 44%, and it’s sustainable.

In two years, Manulife has increased its dividend by 42%, or an average rate of 19.3% per year! This above-average growth is due to its double-digit earnings growth and payout ratio expansion. Going forward, investors should expect a more reasonable growth rate of about 8%, which is in line with the growth rate of the company’s last dividend hike.

Recent disappointment

So far, we’ve discussed positive results about Manulife. However, it was impacted by short-term factors as well, namely oil and gas prices.

Manulife invests for the very long term across various asset classes, but its investments are marked to market on a quarterly basis. Its major disappointment in 2015 was that its net income declined 37% to $2.2 billion due to the accounting impact of the decline in oil and gas prices.

Energy prices in 2016 are expected to continue to be weak, in which case, they’ll negatively affect Manulife’s investment and earnings results further.

Conclusion

In conclusion, Manulife is about 18% undervalued to its normal multiple, indicating there’s about 21% upside potential for Manulife’s price to rise to its fair value. In the meantime, low oil and gas prices will negatively impact Manulife’s earnings.

Manulife’s 4.2% dividend yield remains solid, and cautious investors who like the long-term story of Manulife’s strong footing in the United States, Asia, and Canada could opt to dollar-cost average slowly into the company for long-term gains.

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Fool contributor Kay Ng owns shares of Manulife Financial (USA ).

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