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

Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) is an undervalued company with a long history of operating in Asia, the United States, and Canada. Should you buy it today for long-term gains?

| More on:
The Motley Fool

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Dividend Stocks

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »