Recently, I read an article that talked about stocks which have doubled the dividend over the past decade. Using the Rule of 72, one would need to achieve annual growth rate in excess of 7.2% to achieve this feat.
There are just over 100 Canadian Dividend Aristocrats, which are companies that have raised dividends for at least five consecutive years.
So the pool of candidates that could have achieved a dividend double over the past decade is limited.
In total, there were 15 companies that made the list. A surprising inclusion on this list was Manulife Financial (MFC.TO). Over the past decade, Manulife has growth the dividend by 8%, which is the 11th highest average.
Why does this surprise me? During the Financial Crisis, Manulife was one of the few financial stocks to cut the dividend. In April of 2009, Manulife slashed the dividend by 50%, one of the biggest Canadian casualties. The company took a hit to its reputation, and income investors have been a little skittish ever since.
Perhaps the cut is what allowed Manulife to ramp up the pace of dividend growth faster than its peers. Regardless, it has since emerged as a stronger and better capitalized company, and is one of the best Canadian dividend stocks in the country.
A Canadian Dividend Aristocrat
Market Cap: $46.49 billion
Forward P/E: 7.88
Dividend Growth Streak: 7 years
Payout Ratio (Earnings): 40.73%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 12.00%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
After losing its Aristocrat status back in 2009, it has quietly regained its place among Canada’s top dividend growth stocks and accumulated a seven-year streak. Unfortunately, Manulife along with other financials are at risk of losing their streaks again.
The Office of the Superintendent of Financial Institutions (OSFI) has prohibited dividend growth in light of the ongoing pandemic. There is no clear indication when dividend growth will be allowed to resume, but don’t expect it to be until late 2021 at the earliest.
In any event, Manulife is much better positioned today then it was back in 2009. As any good company does, it learned from its mistakes and is now in a strong capital position.
The company has a strong payout ratio of 40.73% against earnings. Furthermore, Manulife’s payout ratio drops to a mere 11.14% when compared against funds from operations – one of the lowest ratios in the industry.
Manulife is also “fully self-funded” which means that it generates sufficient cash flow to sustain operations “without being dependent on the commercial paper markets or other short-term funding arrangements”. This is not the Manulife of 2009 – it is a much stronger company.
The insurer is also performing quite well against estimates. The company has either met or beat earnings estimates in ten of the last twelve quarters, and there is not a single analyst with a sell rating on the company.
Strong Return on Investments
The markets also forget that these large insurers also have significant investments. Investments that when unlocked, can lead to significant gains. Case in point, Manulife’s $15 million investment in Dye & Durham (TSX:DND) in the spring of 2018.
If the name sounds familiar, it should – Dye & Durham has been one of the most successful IPOs of 2020. Manulife’s stake in the company was worth $28 million when it first listed at $7.50 per share back in June. Today, that stake is worth more than $160 million.
The company is one of the parties looking to cash out on DND’s success. It intends to sell 40% of its stock for gross proceeds of $65M as part of a bought deal offering. Not a bad return in under three years.
Manulife is starting to ride momentum back to pre-pandemic highs but remains one of the most attractively valued insurers. It is trading at only 7.88 times forward earnings and below book value (0.93) - both of which are the lowest in the industry.
Considering the company is expected to grow earnings in the high-single digits over the next couple of years, Manulife still has plenty of runway left. The valuation gap will eventually close, and Canada’s largest insurer is well poised to reward investors.
Take a look at what we think about the potential deal between Amazon and Blackberry (TSE:BB).
*Mat Litalien is long MFC and DND.