The 6.62% Dividend Stock Set to Devour the TSX

This dividend stock is set up for a roaring comeback, with plenty of cash on hand to continue supporting a stable dividend.

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published August 2, 2024 4:00 pm EDT

When it comes to buying a dividend stock, investors want to know that its dividend is safe and that it won’t be going anywhere anytime soon. And to achieve that, a company needs one thing: cash.

Having cash on hand is crucial for a dividend stock because it ensures the company can meet its dividend obligations even during periods of lower earnings or economic downturns. Plus, a strong cash position enables the company to seize investment opportunities, fund growth initiatives, and manage unexpected expenses, all of which can contribute to long-term financial health and sustained dividend payments.

Today, let’s get into one company with plenty of cash on hand already producing an ultra-high dividend.

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First National Financial

Today, we’re going to focus on the superior dividend stock First National Financial (TSX:FN), with its current dividend yield of 6.62%. First National Financial is a leading Canadian mortgage lending company that primarily focuses on the residential and commercial mortgage markets. Founded in 1988, the company has grown to become one of Canada’s largest non-bank lenders, offering a range of mortgage solutions, including single-family residential mortgages, multi-unit residential mortgages, and commercial mortgages.

First National utilizes advanced technology to streamline the mortgage application process, making it more efficient and accessible for clients. This tech-driven approach has helped the company maintain a competitive edge in the industry, attracting a wide customer base and fostering long-term relationships with mortgage brokers and borrowers.

The company is also recognized for its strong cash position, with approximately $891 million in cash and cash equivalents. This liquidity ensures the company can meet its financial obligations, including regular dividend payments, which are a significant aspect of its appeal to investors.

Earnings miss

And yet, shares of First National stock dropped this week as the company announced earnings that fell below estimates. The dividend stock reported second-quarter 2024 earnings of an 8% increase in mortgages under administration (MUA), reaching a record $148.2 billion compared to $137.8 billion at the end of June 2023.

Revenue for the quarter increased by 2% to $538.4 million from $525.9 million a year ago, though missing estimates. However, Pre-FMV Income, which excludes changes in the fair value of financial instruments, decreased by 14% to $77.5 million from $89.9 million in the second quarter of 2023. Despite these challenges, the company maintained solid profitability, which is essential for sustaining its dividend commitments.

First National declared and paid $36.7 million in common share dividends in the second quarter, slightly up from $36.0 million a year ago. This increase reflects the company’s commitment to returning value to shareholders through regular dividend payments — all while holding a stable 66% payout ratio.

Undervalued

First National Financial is now offering up a valuable investment opportunity, particularly due to its strong valuation metrics and strong dividend performance. With a market cap of $2.22 billion, the company’s trailing price-to-earnings (P/E) ratio stands at 9.74, and the forward P/E ratio is 9.94. This suggests that the stock is potentially undervalued compared to the broader market, providing an attractive entry point for investors.

Furthermore, the price-to-sales (P/S) ratio of 3.66 and price-to-book (P/B) ratio of 3.26 further highlight that First National is trading at reasonable multiples relative to its revenue and book value. Add in that the company holds a forward annual dividend rate of $2.45 and a forward annual dividend yield of 6.62%. Meanwhile, the trailing annual dividend yield of 6.51% and a five-year average dividend yield of 5.76% underscore its consistent ability to generate shareholder returns. Finally, the payout ratio of 64.03% indicates that the company retains a significant portion of its earnings for reinvestment while still rewarding shareholders.

Bottom line

Overall, this stock looks undervalued and then some. The stock’s 52-week range shows a low of $32.86 and a high of $41.41, with the current price trends around the lower end, indicating potential for price appreciation. The relatively low short interest (0.82% of shares outstanding) and the high insider ownership (71.45%) reflect strong confidence from management and minimal bearish sentiment among investors.

Altogether, this dividend stock looks undervalued and ready to pop — all while bringing in significant dividend income.