Good income but where is the growth?

POW - Power Corporation

Power Corporation is a diversified international management company with interests in financial services, asset management, sustainable and renewable energy companies. The company is diversified geographically and has operations in North America, Europe, and Asia. It aims to achieve long-term capital appreciation through fundamental investment analysis.

Power Corporations’ operating companies include Power Financial, Power Energy Corporation, Sagard Investment Funds, and China Asset Management. Pursuant to a reorganization transaction with Power Financial in February this year, Power Corp. now owns a 100% stake in PFC compared to 64% at the end of FY 2019. Investment activities include investments in alternative asset managers and investment funds including Sagard Europe, Sagard Holdings, Power Pacific, Power Energy and interests in China. Power Corporation has a ~14% economic interest in China AMC and 100% in Sagard funds. Power Financial accounted for almost 90% of Power Corporation’s net earnings in FY 2018 while Sagard Investment Funds, China AMC and other investments contributed ~10%. Power Corporation has a market capitalization value of $11.4 billion and more than 31 million customer relationships.

Power Corporation has continued to develop investment platforms and operates equity investment funds since the launch of the first Sagard fund in 2002. These funds operate in principal geographies like Europe, North America, and China.

Investment Data

Revenue Growth & Market Exposure

Power Corporation has strong leadership in financial services across geographies and businesses. It has been delivering consistent earnings anchored by its core investment in Power Financial. Most of its businesses are leaders in their operating areas. For instance, China AMC is the premier asset management firm in the world’s second-largest economy. As a world-leading financial services organization, Power Corporation is in a good position to benefit from its long-term relationships in order to achieve superior investment returns and stable cash flows. The company also makes significant investments in non-financial sector investment platforms as a part of its diversification strategy. Power Corporation has been developing its own investment platforms since the early 2000s leveraging its unique long term relations and partnerships.

Over the years, the Power Group has developed extensive experience in wealth management and distribution. Power Corporation’s leading franchises such as Great-West Lifeco, IGM Financial, Pargesa, specialize in insurance, asset management, wealth and retirement and it has implemented an active fintech strategy in recent years. Insurance business provides stable earnings in spite of headwinds. The reorganization with Power Financial aims to eliminate the current dual-holding company structure and further simplify the overall corporate structure. The corporation is looking forward to celebrating its 100th anniversary in 2025.

The corporation’s revenues have grown at a rate of more than 10% CAGR in the last five years. Extensive global network and deep business relationships are Power Corp’s biggest competitive strengths. The corporation’s stake in China AMC offers the potential to diversify and accelerate earnings growth by participating in a high-growth market.

During the year, the Corporation and its operating companies continued to maintain their strong capital positions and reallocate capital and resources to enhance their value creation. Sagard Holdings introduced new asset classes to its line-up of managed assets while the Corporation ended its 50-year association with La Presse. The corporation has said that it would not be possible to reliably estimate the length and severity of the developments caused by the outbreak of coronavirus and the impact on the financial results. 

Dividends

Power Corporation is a Canadian Dividend Aristocrat and paid ~$2 billion in dividends to its shareholders in the last year. It currently has an attractive annual dividend yield of 7.7% and a payout ratio of 64%. The corporation has grown its dividend at a rate of 7%+ CAGR in the last three years. Earnings have also grown at a rate of 9% CAGR in the last five years. Power Corporation declared a 10.5% increase in its quarterly dividend to 44.75 cents per share. It also announced a new NCIB pursuant to which it can purchase up to 30 million of its subordinate voting shares, over a one year period ending in February 2021.

Dividends paid to shareholders of Power Corporation depends upon the operating performance, profitability, and financial position of its subsidiaries and their ability to pay dividends. The Corporation controls IGM Financial – one of Canada’s leading mutual fund firms, Great West Life – another large life insurer, and other insurance firms. Great-West Lifeco increased its dividend by 6% and Pargesa approved a 2.5% dividend increase in the last year. The companies within the Power group stand a good chance to benefit from their strategic relationship to work together on product development and mutually benefit from sub-advisory relationships. Power Corporation’s multiple-decades long investment philosophy includes investing in companies having long-term perspectives with a prudent financial structure, and consistent earnings and dividend growth. 

The reorganization has resulted in Power Financial’s minority shareholders receiving Power Corp.’s subordinate voting shares having a higher Net Asset Value. Power Corporation anticipates near-term cost reductions of nearly $50 million per year within two years by eliminating duplicate public company-related expenses. It also intended to increase its quarterly dividend by 10% to 44.75 cents per share, commencing in 2Q2020.

Competition

Power Corporation’s diversified holdings and a large geographical presence help in limiting sector-specific risks and risks pertaining to specific geographies. The company competes with the likes of Brookfield Asset Management, Berkshire Hathaway, ONEX Corporation, Manulife, etc. Other competitors include ProAssurance, Assurant, AmTrust Financial Services, Federal National Insurance, etc.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:MFCMFCManulifeFinancial ServicesInsurance - Life0.7218.6827.118.0312.752.320.06006.000.482841.120.085158Tollbooth - UnregulatedNONOYESNOCanada1
TSE:GWOGWOGreat West LifeFinancial ServicesInsurance - Life0.6323.9122.1810.9012.752.190.07337.330.800041.750.103147Tollbooth - UnregulatedNONOYESNOCanada1
TSE:POWPOWPower CorporationFinancial ServicesInsurance - Life0.5523.9114.8610.5812.752.260.07497.490.792041.790.107547Tollbooth - UnregulatedNONOYESNOCanada1

Bottom Line

The spread of COVID-19 is having serious consequences for Canadians and the economy which has prompted the Bank of Canada to cut interest rates. Declining interest rates could be a matter of concern for Power Corporation in the long run. The company has been investing and developing its own investment platforms and is well-positioned to gain from its leading franchises. A century-long existence also makes clients trust the Power Corporation brand. The company should benefit from the merger due to company share buybacks, cost reduction, and dividend increases. With all said, Power Corp. is a reliable dividend payer that is forecast to post decent future earnings growth. It can be a good diversification from the telecom or utility sector if you are looking for income at the current yield.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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