Right now, as I understand it, NetworkManager doesn't do anything with
domain name (not did it in the past). The domain name from DHCP isn't
used because different servers appear to send different conflicting
information, which makes it hard to figure out what to use as domain
name (usually they really send a search domain, which is very
different). In previous versions NM simply didn't touch /etc/hosts, the
domain there was left from the initial installation.

As a workaround, you could add a script to the
/etc/NetworkManager/dispatcher.d directory that will handle the hostname
changes.

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https://bugs.launchpad.net/bugs/659817

Title:
  NetworkManage does not set domain in /etc/hosts on DHCP connections

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