For insurers, there’s an extra complication. A profitable quarter isn’t enough. The company also needs sufficient capital behind the promises it has made to policyholders. That gives dividend investors two numbers to watch instead of one.
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Two cushions
The Office of the Superintendent of Financial Institutions (OSFI) regulates federally regulated life insurers as well as banks. For insurers, an important measure is the Life Insurance Capital Adequacy Test, or LICAT. OSFI’s supervisory target for the total ratio is 100%. A ratio comfortably above that level can indicate a stronger capital cushion.
Yet here’s the important bit. Regulatory capital isn’t simply a giant piggy bank waiting for shareholders. Capital can sit inside regulated subsidiaries and may be required to support insurance obligations. The parent company still needs earnings and accessible cash to fund dividends. That’s why I’d examine Manulife Financial (TSX: MFC) using both tests rather than simply sorting Canadian dividend stocks by yield.
Test the payment
Manulife sells insurance and manages wealth across Canada, the United States and Asia. Second-quarter core earnings per share (EPS) reached $1.09. Its current quarterly dividend is $0.49. That means the dividend consumed roughly 44.5% of quarterly core EPS. Now make the earnings environment considerably uglier.
| CORE EPS SCENARIO | DIVIDEND AS PERCENT OF CORE EPS |
|---|---|
| Current $1.09 | 44.5% |
| 25% lower | 59.3% |
| 40% lower | 74.2% |
Those aren’t Manulife forecasts. They simply show how much room exists before the payout becomes uncomfortable. The second cushion also looks healthy today.
The Manufacturers Life Insurance Company reported a 136% LICAT ratio at June 30, well above OSFI’s 100% supervisory target. Neither number guarantees the dividend. Yet together, they make the current payment look considerably more defensible.
What $10,000 buys
At a recent $61.22, Manulife’s $1.94 annualized dividend yields roughly 3.2%. That works out to an average $26.35 per month, though the company actually pays quarterly.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| MFC | $61.22 | 163 | $1.94 | $316.22 | Quarterly | $9,978.86 |
Investors holding those shares inside a Tax-Free Savings Account (TFSA) can generally collect eligible investment income tax-free, provided sufficient contribution room exists.
Foolish takeaway
Insurance claims, weaker investment markets and legacy long-term-care exposure can all pressure earnings. Manulife has been transferring portions of its older long-term-care risk through reinsurance transactions. That’s useful risk reduction, not a magic eraser. The stock can also simply become too expensive. A safe-looking payout doesn’t prevent a share-price decline.
Manulife’s current dividend looks reasonably supported by both earnings and regulatory capital. I wouldn’t call it guaranteed, because it isn’t. I’d call it a payment with room to absorb a tougher environment.
If Manulife keeps shrinking legacy risk while growing its Asian and wealth businesses, future dividend increases could arrive from a stronger foundation rather than merely continuing an old habit.
