Investing in quality dividend stocks with a growing payout is a proven strategy to generate inflation-beating returns over time. In this article, I have identified one top TSX stock that trades at a reasonable valuation in October 2025 and is poised to grow its dividend at a steady pace through 2027.
Valued at a market cap of $8.1 billion, Definity Financial (TSX:DFY) went public three years ago and has since returned over 150% to shareholders. Definity Financial offers property and casualty insurance products in Canada.
It provides personal insurance products, including auto, property, general and umbrella liability, and pet insurance products to individuals under multiple brands. Its product portfolio also includes commercial insurance products such as fleet, commercial auto, property, liability, and specialty insurance to businesses under the Definity Insurance and Economical brand names.
Definity distributes these products primarily through intermediaries and brokers, as well as directly to customers. It markets its commercial insurance products to small businesses, mid-market companies, and various targeted segments.
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Is this TSX dividend stock a good buy?
Earlier this year, Definity Financial announced its most transformative deal since going public. The Canadian property and casualty insurer agreed to acquire Travelers Canada for $3.3 billion, a move that vaults Definity from sixth to fourth place among Canadian P&C insurers and puts the company on track for mid-teen operating returns on equity.
The acquisition adds $1.6 billion in gross written premiums to Definity’s existing $4.4 billion base, representing roughly a third increase in size. In commercial insurance, Definity’s business is expected to grow by over 40%, moving it from seventh to fourth in industry rankings. The personal insurance portfolio could expand by over 30%, strengthening the company’s position in broker-distributed personal lines from seventh to fifth.
Management projects $100 million in annual run-rate expense synergies within three years of closing. These savings come from consolidating technology platforms, eliminating duplicate corporate functions, and removing charges for services currently provided by Travelers’s U.S. parent company. Integration costs should run about 1.5 to 1.7 times the ultimate synergy target.
Definity will fund the purchase using $1.5 billion in excess capital, roughly $1.6 billion in bank and bond financing, and $350 million from a private equity placement. Notably, about $1 billion of that excess capital comes from Travelers Canada itself and will be repaid within six months of closing through an excess capital term loan.
Definity expects a debt-to-capital ratio of around 30% at closing, then plans to reduce this to a 25% target within 24 months. This optimized capital structure should boost run-rate operating return on equity by over 200 basis points, before accounting for any synergies or business improvements.
Sonnet reached breakeven profitability, and the operating expense ratio already hit year-end targets at 11.5%. The Guidewire claims transformation for property and casualty lines stays on schedule for fourth quarter implementation.
Second-quarter results showed the underlying strength of Definity’s business heading into this transaction. Gross written premiums grew 9.1% excluding exited lines. The combined ratio came in at 92.9%, better than company guidance, while operating net income reached $98.9 million or $0.84 per share.
Is the TSX insurance stock undervalued?
Analysts tracking the TSX stock forecast revenue to increase from $4.45 billion in 2024 to $6.71 billion in 2027. In this period, adjusted earnings are forecast to grow from $2.66 per share to $4.43 per share.
A widening earnings base should allow Definity Financial to raise its annual dividend per share from $0.64 in 2024 to $0.92 in 2027. It means the effective yield over three years will expand to 1.35%, up from 0.95%.
If the TSX dividend stock is priced at 25 times forward earnings, which is reasonable, it could gain 50% over the next 18 months.
