Is Intact Financial Stock a Buy for its 1.8% Dividend Yield?

Intact Financial is a TSX dividend stock that has delivered stellar returns to shareholders in the last 15 years.

While investing in dividend stocks offers a low-cost way to begin a recurring passive income stream, it’s essential to analyze whether these payouts are sustainable across market cycles. For instance, several debt-heavy companies, such as Algonquin Power & Utilities, Innergex Renewable, and Northwest Healthcare REIT, were forced to lower their dividends over the last two years due to rising interest payouts.

Basically, a dividend company needs to generate sufficient cash flow to reinvest in organic growth, target acquisitions, service its interest payments, and pay investors a dividend. So, let’s see if you should invest in Intact Financial (TSX: IFC) stock for its 1.8% dividend yield.

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Intact is a financial heavyweight

Intact Financial, valued at $47 billion by market cap, provides property and casualty insurance to individuals and businesses in North America, Europe, and the Middle East. It also offers personal auto insurance and personal property insurance for individuals.

Further, the company provides insurance products for commercial lines for small and medium-sized businesses, commercial property insurance to protect the physical assets of the business, and liability coverage.

Intact Financial went public in May 2009 and has since returned close to 700% to shareholders. However, after adjusting for dividend reinvestments, cumulative returns are much higher at 1,020%.

A strong performance in Q2 2024

In Q2 2024, Intact Financial reported net operating income of $4.86 per share, indicating an increase of over 100% year over year. The increase was tied to solid underwriting performance across all business lines and growth in distribution and investment income. Its revenue rose by 6% year over year due to double-digit growth in the personal insurance business.

Intact Financial ended Q2 with a combined ratio of 87.1%, showing the company is profitable. This ratio is calculated by dividing total claim-related losses and expenses by earned premium, which is the money an insurance company collects to provide customer coverage.

Due to strong operating efficiency, Intact’s return on equity stood at 17.4%, up four percentage points year over year. Intact Financial continues to maintain a strong balance sheet, increasing its total capital margin by $2.9 billion.

In the personal auto business, premiums grew by 11% year over year due to rate hikes and customer growth. The company’s CEO, Charles Brindamour, explained, “The industry continues to face profitability challenges and is pursuing corrective measures. As such, we expect hard market conditions to prevail over the next 12 months and industry growth to be in the double-digits. This environment plays to our strength given early action, advanced segmentation, and deep supply chains. Our brand, distribution and digital leadership help us grow in this tough environment.”

A growing dividend payout for Intact Financial stock

Intact Financial pays shareholders an annual dividend of $4.84 per share, which translates to a forward yield of 1.8%. Its payout ratio of less than 50% has allowed the insurance giant to increase dividends from $1.36 per share in October 2010, indicating a compound annual growth rate of 9.5%.

In addition to its growing dividend, the TSX dividend stock trades at a cheap multiple. Valued at 19 times forward earnings, the Canadian insurance giant is forecast to expand adjusted earnings by 14% annually in the next five years.

Fool contributor Aditya Raghunath has positions in Algonquin Power & Utilities. The Motley Fool recommends Intact Financial. The Motley Fool has a disclosure policy.

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