Sun Life Financial (TSX:SLF) is a blue chip stock that can work as a solid long-term investment for most investors. It is a quality business that enjoys a high S&P credit rating of A+.
In the last 10 years, the dividend stock delivered total returns of 11.7%, beating the Canadian stock market return of about 8.3%. In other words, an initial investment of $1,000 in Sun Life stock transformed into $3,035. In the past 10 years, it increased its adjusted earnings per share at a compound annual growth rate (CAGR) of close to 8.3%. Growing earnings is a key factor that drives returns on a stock.
Dividend
What’s more to like about Sun Life stock is its dividend. Based on price appreciation alone, the stock would have only delivered a CAGR of 7.5% or turned an initial investment of $1,000 into $2,062 over the last 10 years.
At writing, it offers a decent dividend yield of almost 4.5%. The dividend is the foundation for stable returns in an investment. In addition, the life and health insurance company is a Canadian Dividend Aristocrat with a five-year dividend-growth rate of 9.6%. Here is its more recent dividend hike as a reference — Its trailing 12-month (TTM) dividend is 8.9% higher year over year.
Its TTM dividend is covered by a payout ratio of about 56% of net income. Based on estimated adjusted earnings, its payout ratio is projected to be about 44% this year. Either way, Sun Life stock pays a safe and growing dividend.
Going forward, it’s estimated to grow its earnings per share at a CAGR of about 8.6%, which can drive similar dividend growth.
The business
Sun Life has about 85 million clients internationally with approximately $1.37 trillion of assets under management. It has a well-balanced and diversified business — about 41% of which is in wealth and asset management, 32% is in group health and protection, and 27% is in individual protection.
It has four business groups to focus on value creation for clients and shareholders: asset management (about 29% of year-to-date net income), Canada (34%), the United States (23%), and Asia (14%). This appears to be a good business mix that has allowed it to deliver resilient results.
Sun Life has a medium-term target to grow its earnings per share by 8-10% per year, achieve a return on equity of north of 18%, and target a payout ratio of 40-50%.
Investor takeaway
Sun Life stock is suitable for most investors’ long-term capital. At $66.97 per share at writing, the stock trades at a reasonable valuation of about 10.6 times adjusted earnings. Analysts believe the stock trades at a discount of close to 9%. Assuming no valuation expansion, SLF stock can deliver total returns of more or less 13% per year over the next three to five years.
That said, the market is experiencing a pullback, as is Sun Life stock. So, interested investors can cautiously wait for a bigger margin of safety. If you’re really eager to grab some shares, you can watch for a potential dip to the $63-65 level over the near term.
