Undervalued, with a juicy dividend


Manulife Financial based in Canada (IS: MFC) (MFC) is a financial services company that provides financial advice, insurance, and wealth and asset management products and services in Asia, Canada, the United States, and other international markets.

Income-seeking investors may want to take a closer look at Manulife, as it is an undervalued stock with an attractive dividend yield.

Manulife is undervalued

To value Manulife Financial, we will use the excess return model. This approach is more appropriate for financial companies as they tend to have volatile free cash flow.

As a result, trying to create predictions for them is futile. The excess returns model allows us to use historical numbers instead, which are actual results. There are a few steps to follow for this evaluation method.

First, you calculate a company’s excess returns. Then you calculate the terminal value. Add them up and you get your rating. Here’s how it works:

Excess return = (average ROE – cost of equity) x book value per share
Terminal Value = Excess Return / (Cost of Equity – Growth Rate)
Fair value = book value per share + terminal value

We will use the following assumptions for our calculations:

Average return on equity: 11.0% (five-year average)
Cost of equity: 9.6%
Book value: C$25.64
Growth rate: 2.95% (using 30-year Government of Canada bond yield as proxy for long-term growth expectations)

Now that I have my assumptions, let’s insert them into the formulas:

C$0.36 = (0.11 – 0.096) x C$25.64
C$5.41 = C$0.36 / (0.096 – 0.0295)
CA$31.05 = CA$25.64 + CA$5.41

Therefore, Manulife Financial is currently worth C$31.05 per share under current market conditions.

Manulife’s dividend yield rose

For income-oriented investors, MFC pays out a dividend yield of 5.61% on an annualized basis. Looking at Manulife’s historical dividend yield, you can see that it has trended upwards:

At 5.61%, the current yield is at the high end of the range, indicating that income-oriented investors can obtain the stock at a slight discount to returns they have been able to obtain in the past.

Analyst Recommendations

Manulife Financial has a Moderate Buy consensus rating based on three buys and eight holds over the past three months. Manulife Financial’s average price target of C$27.19 implies upside potential of 16.31%.

Final Thoughts

Manulife Financial is a solid company that seems undervalued. In addition, its dividend yield has increased over the past few years and analysts have a favorable view of the stock. Therefore, income-oriented investors may want to consider Manulife stocks as part of their portfolios.

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