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.
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 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.
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%.
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:
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.)
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.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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