Manulife Financial (TSX:MFC) is a solid, yet cheap insurance industry dividend stock that has generated decent dividend-adjusted returns for investors over a decade. The current dividend yield on MFC stock is a tad below 6%, offering new investors a juicy “low-risk” base return on new money. The company has raised dividends at double-digit average rates for a decade to partially insure investor portfolios against the pains of recent market volatility. Actually, Manulife stock could potentially insure your portfolio in the future.
How does investing in Manulife stock provide insurance coverage to an individual’s investment portfolio? The basic concept behind insurance is to provide restitution, reimbursement, or compensation against a financial loss. Insurance cover saves one from selling personal assets at fire sale prices during risk events. Likewise, if your investment holdings can pay you reliable cash and save you from realizing capital losses in bearish markets, they essentially provide insurance to your portfolio.
Manulife stock is a dividend-paying investment that may enable investors to sit out recessions well into a new bull market, essentially preserving the long-term value of their portfolios. Let’s explore this assertion further.
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Manulife: An undervalued, diversified insurance stock
At a $46 billion market capitalization, Manulife Financial is one of the largest insurance stocks in Canada. It boasts a significant presence in Asia, and has a growing business footprint in the United States, and a huge wealth and asset management portfolio that contributed 21% of corporate net income during the first quarter of 2023.
The insurance giant’s revenue and earnings come from diversified geographical and functional sources that cushion Canadian investors against country-specific risks. The business generated just 22% of earnings from Canada during the first three months of this year. Revenue and earnings diversification should reduce the overall risk to Manulife’s financial performance, and help secure its dividend over many investment horizons.
With more than $1 trillion in assets under management, Manulife has a sizeable revenue base for fees and commissions for years to come. Further, given the current higher interest rate regime, the insurance giant should enjoy better net investment returns on the vast insurance premiums it receives from customers.
Bay Street analysts project a respectable 7.4% average annual earnings growth rate for Manulife over the next five years. Shares trade at a forward price-to-earnings (P/E) of 7.1. Thus, Manulife stock could be fundamentally undervalued given a PE-to-growth ratio below 1. According to value investing legend Peter Lynch, a fairly valued stock should have a forward-looking PE that at least equals its future earnings growth rate; otherwise, investors would be paying less for the company’s future earnings growth potential.
Further, Manulife stock seems significantly undervalued when compared to insurance industry peers Sun Life Financial and Great-West Lifeco, which sport forward PEs of 9.9 and 9.7, respectively. Manulife stock could be the cheaper insurance stock to buy for growing passive income yields.
Buy Manulife stock for dividend growth, and potential stability?
Manulife stock is a dividend aristocrat that has raised quarterly dividends for nine consecutive years now. The current MFC stock dividend yields a juicy 5.9% post a recent 10.6% dividend raise for 2023, and was historically well covered by core earnings. The company paid out 40% of income available to common stockholders as dividends during the most recent 12 months. Management has room to raise the dividend again for 2024, and Bay Street analysts project a 6% dividend boost for Manulife stock investors next year.
Growing dividend payouts from Manulife could cover some living expenses, and provide the dry powder to buy more stocks during market downturns. Dividends from Manulife may act as portfolio insurance when you need a cash boost the most.
Most noteworthy, Manulife’s stock price has been relatively less volatile than the broader markets in North America lately. Its one-year beta is 0.64, a measure of volatility against the broader stock market (in this case a much more diversified S&P 500 Index).
Compared to the TSX, MFC stock has been perhaps slightly more volatile with a beta of 1.1. Basically, the insurance stock is almost as stable as the TSX. Holding Manulife stock as a core portfolio position could potentially stabilize the value of a personal portfolio.
