Is Fairfax Financial Stock a Buy for its 1.1% Dividend Yield?

Is Fairfax worth adding to your portfolio?

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Fairfax Financial Holdings (TSX:FFH) has garnered attention as a potential dividend investment. Yet, is it worth adding to your portfolio? Let’s take a detailed look at its recent performance, dividend history, and future outlook to help you decide.

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Into earnings

Fairfax stock delivered a solid performance in the third quarter of 2024, reporting net earnings of $1.03 billion. This represents a substantial achievement, driven by higher adjusted operating income and significant net gains on investments — particularly bonds and common stocks, which totalled $1.29 billion. These results underscore Fairfax stock’s ability to navigate challenging markets effectively, thanks to its diversified investment strategy.

Fairfax stock’s underwriting operations remain robust, achieving a consolidated combined ratio of 93.9% — a key indicator of profitability in the insurance industry. A combined ratio below 100% signifies underwriting profits, and Fairfax stock’s ability to consistently maintain this ratio highlights its strong operational discipline. Gross premiums written also saw an impressive 13.9% year-over-year increase, supported by Fairfax’s acquisition of Gulf Insurance, a move that reflects its commitment to strategic growth.

What about the dividend?

Fairfax stock has a track record of rewarding its shareholders through consistent and growing dividends. The company announced a 50% increase in its annual dividend to $15.00 per share in January 2024, up from $10.00 the previous year. This increase underscores Fairfax stock’s financial strength and its management’s confidence in generating sustainable long-term cash flows. However, despite this growth, the current dividend yield hovers around 1.10%, which is modest compared to many of its peers.

One reason for this modest yield lies in Fairfax’s low payout ratio of around 9.17%. While this means the dividend yield isn’t high, it also indicates significant room for future growth, as the company retains a substantial portion of its earnings to reinvest or strengthen its balance sheet. For long-term investors, this strategy aligns with sustainability and the potential for consistent dividend hikes in the coming years.

Showing strength

Fairfax stock’s financial health remains a highlight. The company holds a strong cash position of $8.69 billion as of the most recent quarter and has shown a commitment to optimizing its capital structure. Looking at its valuation, Fairfax stock trades with a trailing price-to-earnings (P/E) of 8.69 and a forward P/E of 9.35, making it relatively attractively priced for a company of its calibre. Its price-to-book (P/B) ratio of 1.42 suggests that the market recognizes Fairfax’s intrinsic value while still leaving some room for upside. These metrics show that Fairfax offers a compelling mix of value and growth potential, especially for investors who prioritize fundamentals over speculative bets.

The future outlook for Fairfax appears bright. The stock has a proven track record of strategic acquisitions and effective risk management. Therefore, it is well-positioned to capitalize on opportunities in both insurance and investment markets. Its diverse portfolio across insurance, reinsurance, and investment holdings provides a balanced approach to growth and stability, catering to both conservative and growth-oriented investors.

Bottom line

Fairfax stock is an attractive option for dividend investors seeking a reliable and growing income stream. While its current yield may not be the highest, its consistent dividend growth, low payout ratio, and strong financial performance suggest long-term sustainability. It has robust underwriting performance, strategic acquisitions, and disciplined financial management, providing Fairfax stock with a compelling case for inclusion in a dividend-focused portfolio. Still, as with any investment, potential buyers should align their decisions with their financial goals and risk tolerance. Keep in mind that Fairfax’s strength lies in its long-term vision.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fairfax Financial. The Motley Fool has a disclosure policy.

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