Manulife’s Dividend Just Jumped 10%: Is the Stock a Buy?

Manulife stock offers a safe and juicy dividend yield of 5.5% and can deliver annualized returns of about 12.5% over the next few years.

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Manulife (TSX:MFC) stock just raised its dividend by 10.6% last week, which aligns with its 10-year dividend-growth rate of about 10%. The new quarterly payout is $0.365 per share, equating to an annual payout of $1.46 per share. To receive the upcoming quarterly dividend on March 20, investors must own the common shares before the ex-dividend date of Feb. 27.

The power of rising dividends

Although the MFC stock price has been range bound with a resistance at about $27 since 2018, investors saw their dividend income rise 60%. This is the potential power of dividend investing. By doing nothing but sitting on your shares, you could still more than maintain your purchasing power from rising dividends.

Since Manulife stock’s recent payout ratio was roughly 40% of earnings and it maintains a decently strong S&P credit rating of A, investors can expect its dividend to be safe and continue growing in the foreseeable future.

In fact, the shares may be undervalued.

What’s the valuation and return potential of Manulife stock?

Management may take advantage of the cheap shares. The company has launched a share-buyback program that could see it cancelling up to 55.7 million (or about 3%) of its outstanding common stock.

At $26.66 per share at writing, Manulife stock trades at about 8.5 times earnings. This is a discount of about 20% from its long-term normal multiple of about 10.6 times. At worst, the stock is fairly valued based on its normal multiple over the last five years or so. The 12-month consensus price target of $28.80 across 15 analysts also suggests the life and health insurance company is fairly valued. The current stock price also aligns with its book value per share of about $26.49.

Currently, analysts project earnings-per-share growth of roughly 7% per year over the next three to five years. If this growth materializes, and MFC stock’s valuation stays the same, investors can pocket total returns of approximately 12.5% per year — from a 5.5% dividend yield and 7% earnings growth.

Recent results

On February 15, Manulife reported its 2022 earnings results. Net income was stable with an increase of 3% to $7,294 million. Diluted earnings per share climbed by 4% to $3.68. However, core earnings dropped by 5% to $6,182 million, leading to a similar rate decline in the diluted core earnings per share. The return on common shareholders’ equity (ROE) was 14.1%, down from 14.2% in 2021. The core ROE was 11.9%, down 1.1% year over year. The company was able to marginally cut general expenses by 0.6% in 2022 versus 2021.

In the press release, the company listed reasons for lower core earnings as follows: “lower new business gains in Asia and the U.S., losses from the unfavourable impact of markets on seed money investments in new and segregated mutual funds (compared with gains in the prior year) and lower net gains on the sale of AFS equities in Corporate and Other, lower net fee income from lower average assets under management and administration in Global Wealth and Asset Management, lower in-force earnings in U.S. Annuities due to the variable annuity reinsurance transactions and higher charges in our Property and Casualty Reinsurance business in 2022.”

Investor takeaway

Manulife stock appears to be, at worst, fairly valued. It offers a dividend yield of about 5.5% that’s sustainable. Coupled with earnings-growth prospects of about 7% annually, buyers of the common stock today can potentially pocket total returns of, more or less, 12.5%.

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 has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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