Fairfax Financial Holdings (TSX:FFH) has garnered attention as a potential dividend investment. Yet, is it worth adding to your portfolio? Let's take a detailed look at its recent performance, dividend history, and future outlook to help you decide.

Into earnings

Fairfax stock delivered a solid performance in the third quarter of 2024, reporting net earnings of $1.03 billion. This represents a substantial achievement, driven by higher adjusted operating income and significant net gains on investments — particularly bonds and common stocks, which totalled $1.29 billion. These results underscore Fairfax stock's ability to navigate challenging markets effectively, thanks to its diversified investment strategy.

Fairfax stock's underwriting operations remain robust, achieving a consolidated combined ratio of 93.9% — a key indicator of profitability in the insurance industry. A combined ratio below 100% signifies underwriting profits, and Fairfax stock's ability to consistently maintain this ratio highlights its strong operational discipline. Gross premiums written also saw an impressive 13.9% year-over-year increase, supported by Fairfax's acquisition of Gulf Insurance, a move that reflects its commitment to strategic growth.

What about the dividend?

Fairfax stock has a track record of rewarding its shareholders through consistent and growing dividends. The company announced a 50% increase in its annual dividend to $15.00 per share in January 2024, up from $10.00 the previous year. This increase underscores Fairfax stock's financial strength and its management's confidence in generating sustainable long-term cash flows. However, despite this growth, the current dividend yield hovers around 1.10%, which is modest compared to many of its peers.

One reason for this modest yield lies in Fairfax's low payout ratio of around 9.17%. While this means the dividend yield isn't high, it also indicates significant room for future growth, as the company retains a substantial portion of its earnings to reinvest or strengthen its balance sheet. For long-term investors, this strategy aligns with sustainability and the potential for consistent dividend hikes in the coming years.

Showing strength

Fairfax stock's financial health remains a highlight. The company holds a strong cash position of $8.69 billion as of the most recent quarter and has shown a commitment to optimizing its capital structure. Looking at its valuation, Fairfax stock trades with a trailing price-to-earnings (P/E) of 8.69 and a forward P/E of 9.35, making it relatively attractively priced for a company of its calibre. Its price-to-book (P/B) ratio of 1.42 suggests that the market recognizes Fairfax's intrinsic value while still leaving some room for upside. These metrics show that Fairfax offers a compelling mix of value and growth potential, especially for investors who prioritize fundamentals over speculative bets.

The future outlook for Fairfax appears bright. The stock has a proven track record of strategic acquisitions and effective risk management. Therefore, it is well-positioned to capitalize on opportunities in both insurance and investment markets. Its diverse portfolio across insurance, reinsurance, and investment holdings provides a balanced approach to growth and stability, catering to both conservative and growth-oriented investors.

Bottom line

Fairfax stock is an attractive option for dividend investors seeking a reliable and growing income stream. While its current yield may not be the highest, its consistent dividend growth, low payout ratio, and strong financial performance suggest long-term sustainability. It has robust underwriting performance, strategic acquisitions, and disciplined financial management, providing Fairfax stock with a compelling case for inclusion in a dividend-focused portfolio. Still, as with any investment, potential buyers should align their decisions with their financial goals and risk tolerance. Keep in mind that Fairfax's strength lies in its long-term vision.