How Do Major Life Insurance Companies Compare On Dividends?
After the United Kingdom voted to leave the European Union in June, Europe and much of the world are facing significant economic uncertainty. This has led some investors to increasingly shift to relatively safer instruments such as government bonds in developed countries, which is causing bond prices to rise and yields to decline.
Post-Brexit, the yield on the 10-year U.S. treasury note fell below 1.5% for the first time since 2012 and is now at just over 1.5%. Meanwhile, yields on U.K. benchmark government bonds fell below 1% for the first time on record and are currently trading at 0.56%, and 10-year government bond yields in Germany are currently trading below 0%. This is leading to a global hunt for yield, and demands from investors that companies return a higher share of their earnings to shareholders in the form of dividends or share buybacks. To put things in perspective, the S&P 500 has risen by close to 29% in the last 3 years whereas the Dividend Aristocrats index, which includes those S&P 500 companies that have paid dividends to shareholders for 25 consecutive years, rose by 36% in the same period.
In this note, we compare dividend payouts of three major U.S. life insurance companies- Prudential (NYSE:PRU), MetLife (NYSE:MET) and Manulife (NYSE:MFC). To compare these three companies with respect to dividends, we will look at three important metrics:
- Dividend Yield: Ratio of dividends paid per share to price per share. Per this metric, Manulife has paid the highest dividend yield over the last three years and its median yield value over the last 13 years was a strong 3%, compared to 2% paid by Prudential.
- Dividend Payout Ratio: Dividend payout ratio is the share of earnings that a company gives out as dividends. Companies have to strike a balance between giving out dividends to shareholders and reinvesting earnings to fund growth. Generally, a payout ratio below 60% is considered optimum but it may vary depending on the company’s growth cycle and maturity. In the case of life insurers, payout ratio was highest for Manulife in 2015 and Q2 2016, but MetLife was better in terms of median payout ratio over the last 13 years. This suggests that MetLife has managed to keep a consistent payout ratio around 40% in the last decade whereas Manulife has only recently managed to increase its payout ratio to around 50%-60%, with its median payout being around 27%. For perspective, the S&P 500 payout ratio rose to 37.93% this month (calculated for trailing twelve months), which is its near its highest levels of 38.16% reached in Feb 2009. This ratio was near 33% at the beginning of 2015 and 36% at the beginning of 2016.
- Dividend Growth Rate: Looking only at dividend yield (which can be high because of a depressed stock price) or payout ratio (which can be unsustainable if unusually high) can be misleading in terms of gauging a stock’s desirability as a dividend stock. In such a scenario, it is important to look at the company’s dividend over the last few years and how much it has grown/shrunk. In the case of major life insurers, Prudential has managed to increase its dividend consistently since 2008 and shows a CAGR of 16% over the last 5 years. On the other hand, Manulife managed to show continuous dividend increases since only 2013 and it reported a CAGR of just 4% over the last 5 years.
Have more questions about life insurance companies? Please refer to our complete analysis for PRU MET MFC
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