A stock market correction has caused Manulife (TSX:MFC) and Canadian Imperial Bank of Commerce (TSX:CM) to sell off recently. They now offer similar dividend yields of north of 6%. Which is a better buy today? Let’s compare them.
Dividend
Manulife stock has maintained or increased its dividend since 2011. Its three-, five-, and 10-year dividend-growth rates of 9.7-10% were primarily supported by earnings growth. At writing, the life and health insurance stock offers a dividend yield of almost 6.1%. Its trailing 12-month payout ratio is sustainable at 40% of its net income available to shareholders.
Canadian Imperial Bank of Commerce, or CIBC, has maintained or increased its dividend for at least 50 years. Its three-, five-, and 10-year dividend-growth rates were 5.2-6.1% with support from earnings growth. Its trailing-12-month payout ratio is 61% of its net income available to shareholders. It also has an outsized reserve of retained earnings of about $29.2 billion that could serve as a buffer for about 13 years of dividends.
Earnings and valuation
Over the past decade, Manulife increased its adjusted earnings per share by 10.7% per year. For some reason, though, since 2018, its valuation has been depressed — more so than its peer, Sun Life, which increased its adjusted earnings per share by about 8.3% per year in the past decade.
At about $24 per share at writing, Manulife stock trades at about 7.6 times its blended adjusted earnings with an expected earnings-per-share growth rate of about 7.4% per year over the next three to five years.
In comparison, at $66.40 per share at writing, Sun Life stock trades at about 10.6 times its blended adjusted earnings with an expected earnings-per-share growth rate of about 7.0% per year over the next three to five years. Indeed, the 12-month analyst consensus price target suggests Manulife trades at a bigger discount of 17% versus Sun Life’s discount of roughly 10%.
In the past 10 years, CIBC increased its adjusted earnings per share by 5.7%. At $55.25 per share at writing, the bank stock trades at about 7.9 times its blended adjusted earnings, a discount of close to 20% from its normal levels, as its earnings per share is expected to grow only about 2% per year over the next few years.
Price action
Both stocks of Manulife and CIBC have trended downwards recently. Manulife stock is about 11% below its 52-week high of about $27 per share, while the big bank stock has declined a whopping 29% from its 2022 high.
Investor takeaway
Manulife enjoys an S&P credit rating of A, while CIBC enjoys an S&P credit rating of A+. Since in the near term, they may continue to be weighed down, investors should focus on the nice dividend income they produce and have a long-term investment horizon of at least five years.
Between the two, it appears Manulife is a better bargain today, as it trades at a lower multiple and offers higher earnings growth potential, which could also lead to higher dividend growth over the next few years. That said, CIBC does offer a slightly higher dividend yield and a longer and stronger dividend track record. So, income-focused investors can consider picking up shares of both at current levels and on any further weakness.
