Is Fairfax Financial Holdings (TSE:FFH) Still a Buy Despite Rising Payout Ratios and Slower Earnings Growth?

Fairfax Financial Holdings (TSE:FFH) has long been a standout in the global insurance and investment landscape, celebrated for its contrarian strategies and ability to compound capital at exceptional rates. But as the company navigates a shifting macroeconomic environment—marked by rising payout ratios and slowing earnings growth—investors must ask: Can Fairfax's historically robust return on equity (ROE) and disciplined reinvestment strategies sustain long-term value creation?

A Legacy of Capital Efficiency

Fairfax's 16% ROE in 2025, calculated as $4.4 billion in net profit divided by $28 billion in shareholders' equity, remains a key draw. This outpaces the industry average of 13%, reflecting the company's mastery of capital allocation. CEO Prem Watsa's philosophy of deploying capital into undervalued assets during market pessimism has repeatedly paid off, as seen in its recent forays into AI-related equities and data infrastructure. These investments, made when others were retreating, now position Fairfax to benefit from the sector's maturation.

However, the company's payout ratio—a measure of earnings distributed as dividends—has risen from a median of 8.1% to 0.35 in Q1 2025. While this signals a shift toward rewarding shareholders, it also raises concerns about reduced reinvestment flexibility. Analysts project the payout ratio to reach 14% by 2028, which could drag ROE down to 10%. Yet, this need not spell trouble for long-term investors.

Reinvestment Strategy: The Engine of Growth

Fairfax's reinvestment approach is its crown jewel. With $4 billion in cash and short-term investments, the company remains uniquely positioned to act during market dislocations—a strategy that served it well during the 2020 pandemic and 2022 rate hikes. Its recent focus on value-oriented investments, such as shorter-term corporate bonds and stakes in Eurobank and Poseidon, generates predictable income while avoiding complex, high-risk instruments.

Moreover, Fairfax's underwriting discipline has proven resilient. In Q2 2025, it achieved a 14.5% increase in book value per share to $1,080, driven by record underwriting profits and strong investment returns. This underscores its ability to grow capital organically, even amid catastrophe losses like California wildfires. The company's conservative fixed-income portfolio—70% in U.S. treasuries—further buffers against volatility, ensuring steady cash flows to fund both dividends and strategic investments.

Balancing Payouts and Growth

The rising payout ratio is a double-edged sword. While it may dampen future ROE, it also signals confidence in Fairfax's earnings resilience. The company has maintained a $15/share dividend for years, and its 18.6% annualized dividend growth over the past three years demonstrates its capacity to reward shareholders without compromising growth. Share repurchases, such as the $289.2 million spent in Q1 2025, further enhance shareholder value by reducing the equity base.

Critically, Fairfax's reinvestment focus remains intact. Its 92% retention rate (historically) has fueled 30% five-year earnings growth, outpacing the industry's 11%. Even with a projected 14% payout by 2028, the company's fortress balance sheet and $2 billion annual income from bonds and associates provide ample dry powder for strategic bets.

Risks and Realities

The primary risk lies in slower earnings growth. If macroeconomic headwinds persist, Fairfax's ability to reinvest at high returns could face pressure. However, its decentralized operational structure—where each subsidiary is led by entrepreneurial presidents—ensures agility. This model has historically allowed Fairfax to pivot quickly, whether into cybersecurity or undervalued tech stocks.

The Verdict: A Buy for the Long-Term

Despite rising payouts, Fairfax remains a compelling buy for investors with a multi-decade horizon. Its ability to compound capital at high rates—bolstered by Watsa's contrarian edge and a $4 billion liquidity buffer—offsets near-term concerns. The projected 10% ROE by 2028, while lower than today's 16%, still outpaces most peers and aligns with its conservative, value-creation ethos.

For those wary of slower earnings growth, Fairfax's diversified revenue streams—spanning underwriting profits, bond income, and equity stakes—offer a safety net. The company's recent forays into AI-related equities and data infrastructure also hint at future growth catalysts.

In the end, Fairfax's strength lies in its ability to adapt. As Watsa once said, “The best time to buy is when others are selling.” With its contrarian playbook intact and a balance sheet to rival the best, Fairfax Financial Holdings is still a buy—just one that demands patience.