3 Reasons to Consider This Foreign Income Play
Looking for a Rock-Solid Dividend Stock? Read This
If you’ve been following this column, you’d know that, as a conservative income investor, I’m a big fan of financial institutions in Canada.
The reason is simple: while the U.S. has some great dividend-paying financial companies, there were plenty of dividend cuts in the sector during the last financial crisis. Canada, on the other hand, has a financial sector featuring less competition and more stringent regulations. As a result, most of Canada’s big financial institutions maintained their payouts to dividend investors in the last downturn.
One of those established Canadian financial stocks is Sun Life Financial Inc (NYSE:SLF), a Toronto, Ontario-based company that’s mostly known for its life insurance products. Sun Life’s history can be traced all the way back to 1865.
Today, it is a leading international financial services organization that provides insurance, wealth, and asset management solutions to individual and corporate clients in Canada, the U.S., Asia, the U.K., and other parts of the world. As of June 30, 2019, the company had over CA$1.0 trillion in total assets under management.
Note that, while Sun Life is based north of the border, its shares trade on both the Toronto Stock Exchange and the New York Stock Exchange. So it’s very convenient for American investors to pick up Sun Life stock. On both exchanges, the company’s ticker symbol is “SLF.”
Of course, because America also has plenty of large financial institutions, SLF stock doesn’t really make too many headlines in the news.
But if you are a conservative income investor, there are three reasons why Sun Life stock could be an excellent opportunity.
Sun Life Financial Inc Offers a Generous Dividend Yield
The first reason is simple—yield.
After a prolonged rally in the U.S. stock market for the greater part of the last decade, many blue-chip stocks have gotten expensive. And due to the inverse relationship between dividend yield and stock price, the rise in equity prices means their yields are now subdued.
The last time I checked, the average S&P 500 company was paying just 1.9% annually. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed August 29, 2019.)
Sun Life Financial Inc, on the other hand, pays quarterly dividends of CA$0.525 per share. At the current share price, this translates to an annual yield of four percent for SLF stock.
Sun Life Financial Inc Offers Top-Notch Dividend Safety
Of course, if you use a stock screener, you can easily find stocks with higher yields than SLF.
What makes Sun Life stock particularly appealing to risk-averse income investors is how safe the company’s dividends are.
You see, in 2018, Sun Life Financial Inc generated underlying earnings of CA$4.86 per share, which represented a 17% increase year-over-year. For the year, the company paid total dividends of CA$1.905 per share. (Source: “Sun Life Financial Reports Fourth Quarter and Full Year 2018 Results,” Sun Life Financial Inc, February 13, 2019.)
In other words, the company achieved a dividend payout ratio of 39% last year, leaving a wide margin of safety.
Sun Life Financial Inc Offers Strong Dividend Growth Potential
The best part is, despite already paying a very generous dividend, SLF still has the potential to deliver more dividend hikes.
You see, although Sun Life is a century-old company, its business is still growing.
According to the latest earnings report, Sun Life Financial Inc’s underlying earnings came in at CA$1.24 per share in the second quarter of 2019. This marked a three-percent increase from the CA$1.20 per share earned in the year-ago period. (Source: “Sun Life Reports Q2’19 Reported Net Income of $595 Million and Underlying Net Income of $739 Million,” Sun Life Financial Inc, July 31, 2019.)
Considering that the company paid a cash dividend of CA$0.525 per share for the second quarter, its payout ratio came out to 42%.
Going forward, the company expects to deliver underlying earnings per share growth of eight to ten percent, while maintaining a dividend payout ratio of 40% to 50% in the medium term. Considering where Sun Life’s payout ratio is right now, achieving its medium-term objective will likely mean an increasing dividend stream delivered to SLF stock investors.
As a matter of fact, Sun Life stock has already built a solid dividend growth track record.
Like I said, the company did not cut its dividend in the last financial crisis. And since 2015, management has raised the company’s quarterly dividend rate on nine different occasions, by a total of 46%. (Source: “SLF – Sun Life Financial Inc. common shares,” Sun Life Financial Inc, last accessed August 29, 2019.)
Bottom Line on Sun Life Financial Inc
At the end of the day, there is competition in Sun Life’s business. But the company doesn’t seem to have any problem outperforming its peers in each of its operating region in terms of shareholder return.
In the five-year period ended December 31, 2018, Sun Life stock delivered an annualized total shareholder return of 7.7%, substantially outperforming the Canadian life insurers’ average (1.4%), U.S. life insurers’ average (1.5%), European life insurers’ average (4.4%), and Asian life insurers’ average (5.6%). (Source: “Investor Day 2019,” Sun Life Financial Inc, last accessed August 29, 2019.)
Past performance does not guarantee future results. But with a high current yield, safe dividends, and solid growth potential, SLF stock is well-positioned to keep delivering over-sized returns to income investors.