Manulife Financial Stock: Undervalued, with a Juicy Dividend

Canada-based Manulife Financial (TSE: 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 because it is an undervalued stock with an attractive dividend yield.

Manulife is Undervalued

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

As a result, trying to create forecasts 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 valuation method.

First, you calculate a company’s excess returns. Next, you calculate the terminal value. Add them up, and you get your valuation. 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% (used 30-year Government of Canada bond yield as a proxy for long-term growth expectations)

Now that I have my assumptions, let’s plug 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)
C$31.05 = C$25.64 + C$5.41

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

Manulife’s Dividend Yield Has Been Increasing

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

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

Analyst Recommendations

Manulife Financial has a Moderate Buy consensus rating based on three Buys and eight Holds assigned in the past three months. The average Manulife Financial price target of C$27.19 implies 16.31% upside potential.

Final Thoughts

Manulife Financial is a solid company that appears to be undervalued. In addition, its dividend yield has trended higher over the past several years, and analysts have a favorable view of the stock. As a result, income investors may want to consider Manulife stock as part of their portfolios.

Read full Disclosure