What’s Wrong with Manulife stock’s Big Dividend?

When the World Health Organization announced that the world was experiencing a pandemic around March 2020, the regulator tightened restrictions to prevent federally regulated financial institutions like Manulife (TSX:MFC)(NYSE:MFC) from increasing their dividends. This is why the life and health insurance company froze its dividend for eight consecutive quarters.

When the regulator lifted the ban about a month ago, Manulife quickly announced a dividend increase of almost 17.9%. Its new quarterly dividend is C$0.33 per share, equating to an annualized payout of C$1.32 per share. The negative sentiment around the stock market in the last week pressured this dividend stock lower. Consequently, investors can now buy shares for a juicy dividend yield that’s flirting with 5.7%.

The dividend stock is not a darling

For some reason, Manulife stock tends to trade at a substantial discount to its peer, Sun Life (TSX:SLF)(NYSE:SLF). Maybe it’s because of their different business mix. Sun Life’s business is much more diversified, leading to more quality earnings. Here’s an overview of Sun Life’s net income diversification.

Source: Sun Life 2020 annual report

At the end of 2020, Manulife’s assets under management and administration were just under $1.3 trillion. These were similar levels as Sun Life. However, MFC has greater exposure to Asia, which contributes about a third of its core earnings. It also earns about 31% and 18% from the U.S. and Canada, respectively, while global wealth and asset management contribute approximately 17%.

MFC and SLF PE Ratio Chart

MFC and SLF PE Ratio data by YCharts

According to YChart’s data, Manulife stock trades at a discount of about 38% to Sun Life stock right now. This is why Manulife’s dividend yield of almost 5.7% is much higher than Sun Life’s yield of close to 3.9%.

I recall Barry Schwartz, the chief investment officer and portfolio manager at Baskin Wealth Management, saying on BNN that Manulife’s portfolio was so complicated that he doesn’t understand it. This may be another reason why MFC trades at a steep discount to SLF most of the time.

Should you buy Manulife stock for income or total return?

Just because Manulife tends to trade at a big discount to Sun Life doesn’t make it a bad investment. Investors can view it as a value stock that pays a big dividend yield. At least, its dividend appears to be safe.

MFC’s 2021 and 2022 payout ratios are estimated to be about 36% and 37%, respectively, which align with its more recent historical levels as circled below.

Source: F.A.S.T. Graphs

Analysts estimate that Manulife can increase its earnings per share (“EPS”) at a compound annual growth rate (CAGR) of 9 – 13.8% over the next three to five years. However, I’ll be more conservative and use an EPS growth rate of 8% instead in the graph below. Over the next five years, the stock can deliver a CAGR of +18% in total returns if its P/E expands to 11 (which I think is reasonable for an 8% growth rate). Let’s say MFC’s P/E only expands to 9, buyers today would still get a solid CAGR return of +14%.

Source: F.A.S.T. Graphs

Even if the dividend stock doesn’t budge, at least, investors can still enjoy a juicy passive income. I think any diversified investment portfolio could benefit from having a portion of its capital in safe, high-yield dividend-growth stocks like Manulife, especially in today’s kind of environment where some growth stocks are falling off the cliff.

I just cherry-picked some growth stocks for illustration purposes:

MFC Total Return Level Chart

Total Return Level data by YCharts

Do you have something to say?

  • Tell us if you have thoughts about why SLF tends to trade at a premium valuation to MFC
  • Are there any dividend stocks you want me to write about? (For now, I’m thinking about sticking to the high-yield theme so I might write about Bank of Nova Scotia, CIBC, or Algonquin next.)

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Disclosure: As of writing, we own shares of Algonquin, LightSpeed, Goodfood, and Manulife.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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2 thoughts on “What’s Wrong with Manulife stock’s Big Dividend?

  1. Pat

    I have been a shareholder of MFC for about 5 years. I recently chose to sell my position when it hit 25$/share. My position in the financial sector was a bit high and I was considering make a buy in an another stock. During those year, I always read comment about MFC valuation was under value. I still read the same comment today. Will that change in the next 5 years? That said I do make money with MFC, and I may buy it again. Here is how I view that stock now. If buy at a good price, I view MFC as a bond proxy. I would use it to get a good dividend while waiting for other opportunity. Compare to GIC and High interest saving account, MFC is a far better investment.

    In a world with very low interest rate, I would be interest to get your opinion about stock to consider as a bond proxy (Bank, Utilities, REIT).

    Thank’s again for your good work. It’s a pleasure to read you.

    1. Passive Income Earner Post author

      Hi Pat, thank you for sharing your investing experience with MFC. I don’t know if Manulife’s undervalued nature will change in the next 5 years. No one has a crystal ball. However, MFC doesn’t need to trade at a higher valuation for investors to make money. As long as it can keep growing its dividend healthily with earnings growth over time, though, the stock can trade higher. While some people view stocks like BCE and MFC as bond proxies that pay more income than GICs and savings accounts, at the end of the day, they’re stocks. Investors need to be ready to hold the shares longer if they end up buying at a wrong time and the stocks go down afterwards.

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