Recent Buy – Power Corp of Canada

POW

May is usually a month which sees plenty of volatility return to the stock market as traders and short-term investors tend to sell their holdings and go away for the summer. This cycle, called Sell-In-May-And-Go-Away, usually provides great opportunities for long term investors to initiate or add to positions. However, this year seems to be a pretty quiet one as well – similar to previous years, with just a bit of sell-off half-way through the month, although the bond market is seeing quite a rout in the last few weeks. The winds will surely reach the stock market sooner or later, and I continue to watch patiently. For now, I have decided to deploy a small amount of cash to initiate a new position.

I initiated a new position in Power Corporation of Canada (POW.TO) with 35 shares @ C$32.63. The company yields 3.8% adding C$43.57 to my annual passive income. Power Corp fills a crucial gap in my portfolio and is the first insurance focused company in my portfolio.

Corporate Profile

From Yahoo! Finance:

Power Corporation of Canada operates as a diversified international management and holding company with interests primarily in the financial services, communications, and other business sectors in Canada, the United States, and Europe. The company offers life insurance, health insurance, and retirement and investment management services; executive benefits, annuities, and mortgage products; and wealth management services, as well as manages and distributes mutual funds and other managed asset products. It also engages in the asset management and reinsurance businesses; and owns La Presse, the French-language news medium. In addition, the company operates an Internet-based career and recruitment business, and real estate Internet advertising business; and provides equity investment funds. Further, it operates as a rooftop solar power producer; and owns and operates hydropower facilities. Additionally, the company holds interests in various sectors, such as specialty minerals, cement, aggregates, concrete, oil, natural gas, wines and spirits, electricity, energy and environmental services, water and waste management services, as well as testing, inspection, and certification. Power Corporation of Canada was founded in 1925 and is based in Montréal, Canada.

Recent Buy Decision

  • My portfolio was missing an insurance name – and this is one of the most conservative and well managed insurance companies in Canada.
  • While most Canadians aren’t familiar with the Power Corp name, almost everyone is familiar with its subsidiaries such as Great West Lifeco, IGM Financial, Investors Group, Mackenzie Investments etc. These are very well respected names in investments and asset management in Canada.
  • While the main focus is insurance, the company is well diversified – with businesses in asset management, reinsurance, media, utilities investments etc. Power Financial (PWF.TO) is its largest subsidiary and makes the bulk of its operations (Power Corp owns 66% stake in Power Financial), but I like the diversification aspect of the parent company and decided to invest in Power Corp (POW.TO) instead. Following is the organization chart.

Power Corp or Canada

  • Power Corp froze its dividends from 2009-2015. Last week, the company announced its quarterly results and increased its dividends by 7.3%. The dividend raise has been long overdue as the financials have been well in order for some time now. Its main subsidiary, Power Financial raised dividends last year after the freeze in 2009. The management has demonstrated to be extremely cautious and conservative.
  • In addition to the diversification achieved by the type of business, the company is also well diversified geographically. The company’s operating earnings come: 58% from Canada, 30% from Europe, and 12% from USA.

Power Corp Geographical Diversification

  • The stock is sound financially and is currently undervalued.
    • P/E: 11.85
    • Forward P/E: 10.3
    • P/B: 1.2
    • Current Ratio: 14.71 (Cash: $91B; $198 / share)
    • Earnings growth past 5 yrs: 4.49%
    • (Estimated) Earnings growth next 5 yrs: 10.8%
    • PEG Ratio: 1.03
    • Yield: 3.8%
    • Payout ratio: 46%
    • S&P rating: Stable (Senior debt rating: A)
  • Although not a deciding factor, the company has some illustrious names associated in its history books. Formed by Arthur Nesbitt (of ‘Bank of Montreal Nesbitt Burns’ fame) and Peter Thompson – the company is now controlled by the Desmarais family. The company has also seen former Canadian prime ministers such as Paul Martin, Jean Chrétien, Pierre Trudeau, Brian Mulroney and premiers of Ontario, Quebec etc either serving on the boards or associated in other ways. More details here.

Risks

As with any investment, Power Corp comes with risks

  • Canada has recession staring in its face and this could affect the company’s financials since 58% of its earnings come from Canada. The company is heavy in the financial sector with its investments and asset management segments, which could see some tough days ahead. In addition, as investors move to self-serve ETF-based index fund investing, the asset management segments could see some outflows.
  • Europe, where 30% of the earnings come from, is also going through some tough times and Power Corp could face some headwinds on that front.
  • The insurance segment faces a lot of risks due to the inherent type of business such as regulatory and accounting changes, demographic changes, interest rate changes, catastrophic loss events etc. This report from KPMG, although a year old, is a good read of risks facing the insurance industry.

Conclusion

Power Corp of Canada is a well diversified insurance, investment and asset management company. The company is conservative with its finances and just announced an increase to its dividends after a freeze in 2009. According to my analysis, the company has a fair value of $39.66 and is currently 17.6% undervalued. As a bonus, here is a F.A.S.T Graphs chart of Power Corp.

POW-FASTGraphs

Further Reading:

What are your thoughts on this purchase? Do you own Power Corp of Canada? Share your thoughts below.

Full Disclosure: Long POW.TO. My full list of holdings is available here.

29 thoughts on “Recent Buy – Power Corp of Canada

    • The company is extremely attractive at current levels. They are hoarding cash – and I will be interested to see how they deploy it. They might be planning big purchases in the coming quarters…although I havent heard any such rumors.

      R2R

      • Hi eldee,
        Thanks for stopping by and the comment. I am not looking for short term capital gains or trying to time the market. I simply invest a small amount – initially to get my feet wet and as I research more on the stock, I decide to keep adding (hopefully I would have done that before initiating a position, but I like having some skin in the game before committing more capital).

        Like Hustler said – a few purchases like these – and I will have a sizable position in the company.

        Best wishes
        R2R

  1. Thanks for sharing the informative post R2R. I like this company a lot and have considered it as well. Awesome purchase. I like the insurance business and like the fact that the industry doesn’t change much. Nothing really to disrupt their moats even with the rapid changes in tech. Keep up the hustle and take care my friend.

    • Ive been reading up on it for a while and decided to finally initiate. The fundamentals are extremely strong and a great management. I also like the fact that one family controls the company – which means they arent trying to manipulate the stock price for short term gains.

      Hope things are well on your end.

      cheers
      R2R

  2. Hey R2R,

    Needless to say I am 100% confident in this new buy of yours. POW is one of of my main 4 holdings.

    (http://www.monsieurdividende.com/2015/03/power-corp-pow-one-of-4-my-main-holdings.html)

    What I love most about this stock is its diversification. We all know how over-used this concept is in the world of finance… but by buying stakes in Power Corporation you buy a lot more than Insurance and Financial Companies. You also buy Sagard Investments in Europe, North America and China. Power had put 1G$ into those funds in 2002 and it’s now worth well over 1,5G$…

    You also buy Pargesa, which holds significant positions in large companies based in Europe, such as Pernod Ricard, Total, Imerys, Lafarge, to name a few.

    It’s also a big investing conglomerate. And a conservatively managed one.

    They froze their dividend in 2009, not because they couldn’t afford to hike it… but because they wanted to make sure they could do so over a long period of time. Expect more raise to come as the company is developing.

    That is wise managing in my view. Barrick Gold should take notes.

    • I remember that article, MD. And our exchange on Twitter on Friday nudged me to finally open a position. Now that I have some skin in the game, I am reading more and more…and as I said, the more I read, the more I like this company.

      The diversification is fantastic and I love the fact that I am getting exposure to the European market in addition to US and Canada. Love the investments in Ricard, Total, Suez etc. I think this is just the start of a long streak of dividend raises…I will be looking to add more shares in the future.

      Thanks for stopping by and sharing your thoughts

      Best wishes
      R2R

  3. Congratulations on the recent purchase, it appears undervalued right now based on the presented valuations with a big growth potential going forward. Aren’t you a little concern about the frozen dividends from 2009-15?

    • FFF,
      I havent read any official statement from them on why the dividends werent raised from 2009-15. All other research simply seems to point to the fact that the management is conservative.
      I am confident in the management myself and the huge cash position is comforting. The Current Ratio is quite spectacular – and Im sure they will put that cash to good use.

      R2R

      R2R

  4. Great buy R2R. I need to dig in deeper, but I have been intrigued since you first told me about this one. Conservative is an understatement. There is like 6 times as much cash on the books as debt for POW. Thanks for sharing this find
    -Bryan

    • Thanks, Bryan.
      Yeah..they are in a very strong financial position and looking at the books, they sure could have raised dividends years ago easily, but chose not to. Looking forward to see whats in store for the company and shareholders.

      Best wishes
      R2R

  5. R2R,

    Interesting buy! Insurance is truly one of my favorite industries. I remain underexposed there, but hope to change that as I go along here.

    A frozen dividend for so long isn’t really what I’d like to see – especially if they were fully capable of raising it all along (that might be worse?) – but it sounds like you’re confident about their prospects moving forward. Seems like they have a healthy cash pile there. Hope they put it to good use for you and the other shareholders! 🙂

    Best regards.

    • Thanks for the comment, DM.
      While I have been looking up on insurance companies, I ended up going a route of a financial conglomerate of sorts. The insurance business is great and I would still like to add one there – top of my list is Chubb Corp (CB) and will be researching that in the coming weeks.

      It was a long frozen dividend – I am yet to find a decent story on why it wasnt raised earlier. However, I am confident in management for the long run, and the cash position is comforting.

      R2R

  6. Solid buy but the frozen dividends is a bit of a worry. Having said that Manulife did freeze their dividends for a few years as well. Seems to be a common practice for insurers the last while.

    • Hi Tawcan,
      Yeah the dividend freeze is a bit concerning, but now that its raised we’ll see if its the start of a streak. Even if it isnt raised, 3.8% for a safe investment aint so bad 🙂

      Thanks for stopping by
      R2R

  7. Hi Roadmap2Retire,

    I am a Canadian and currently only investing in Canadian companies due to the conversion rate from the CAD to the USD. I am also missing a dividend stock position for an insurance company in my portfolio.

    I’m just wondering why you purchased this stock instead of MFC or SLF? Just curious and would love to learn a bit.

    Best regards,
    Dividend Beginner

    • Hi DivBeginner,
      Glad you found my blog and stopped by to comment. I will be sure to stop by your blog and check it out as well.

      Both MFC and SLF have very similar mix – and I really like the fact that they are diversified with good exposure to the Asian market. I am not done with insurance names in my portfolio – and I will be diving in those names when I revisit insurance. Last time I looked at them, MFC had a frozen dividend – but I understand they have started raising it again. I cant remember the state of SLF off the top of my head. Definitely worth exploring. Thanks for bringing it to my attention.

      regards
      R2R

  8. eldee says:

    hi R2R……found this for you today from April 23, 2015 – G&M
    re: POW upgraded to 10/10 top rating…article starts after David Baskin comments on POW…enjoy the read…..eldee

    theglobeandmail.com

    Stock analysis: Strong fundamentals get Power Corp. a top rating stock score.
    I think you are right, it is a good time to accumulate POW. I use to own it a while back.
    David Basking of Baskin Wealth….a value investor….he and his co. love this value stock…

    He has said in the past on May.12.2015
    “A lot of moving parts in this company. A huge power in life insurance, but also huge in the managed money business through Investors Group. The latter had kind of a crappy quarter and lifecos are still having trouble making money with low bond yields. He bought this because eventually people are going to make money on bonds again. Also, thinks there is a possibility of something big happening in the company following the demise of the founder Paul Desmarais. It is trading at a reasonable price.”

    …………………………………

    GILLIAN LIVINGSTON

    StockReports+ is a Thomson Reuters service that helps investors pick equities by simplifying the process of evaluating stocks, finding new trading ideas, and understanding trends affecting markets and industries. Globe Unlimited subscribers get unlimited access to these reports from about 7,000 companies, which normally retail for $25 each.

    Power Corp. (POW-T) has been given a 10 out of 10 by StockReports+ for the past seven weeks. The company is “currently among an exclusive group of 68 stocks awarded our highest score of 10,” the service said in its report. Fairfax Financial Holdings is one of the other stocks in the insurance group that has a 10 rating. Power’s lowest score has been a seven in October, 2014. Currently, five analysts have a “buy” rating and two have a “hold” rating on the stock, which has a one-year return of 9.3 per cent and a five-year return of 14 per cent. The stock currently trades around $33.55 and the mean 12-month price target for the company is $37.50. In the past two quarters, the company’s earnings have had a positive surprise compared to expectations. The company’s dividend yield is currently 3.5 per cent.

    “Power Corp. is currently valued at a discount to the S&P/TSX composite index based on price-to-sales ratio, trailing price-to-earnings, and forward price-to-earnings,” the report said.

    • Thanks for sharing, eldee. I really appreciate you sharing your research on the companies.

      I was very impressed with the history and the management of the company. The long term prospects are also fantastic – and I will be accumulating shares in the company over the coming months. I am not sure what the “something big” refers to – probably speculating there, but I guess we will wait and see. What my research yielded was that the Desmarais family is still in good control of the company and I for one think thats a great thing – as they arent trying to make a quick buck by driving the stock prices up as some activist investors do. The only big thing I would expect from them is if they decide to spin off or divest some part of their financial conglomerate.

      cheers
      R2R

  9. eldee says:

    my pleasure !…..I like reading your blogs. I like helping others out where I can.

    Sept.22.2014……
    comment by David Baskin…….somethink big….in his comment he speculates that the co. might be broken up. The sum of the parts will be worth more than the whole…here is his comment…

    “Nobody has made any money in this company for a long time. Part of that is the malaise affecting the insurance industry. With very low bond yields, insurance companies can’t really invest their unearned premiums and make very much money. That is about to change. Bond yields are going to start going up in about a year from now, which is excellent for insurance companies. With the demise of Paul Demaray, the control block of this company is, at least notionally, in play. If they break it up, the parts are worth more than Power Corp. Also, Investors Group is increasing assets under management, which will increase the cash flow going upstream.”

    • I agree with that statement – I think the parts are worth more than the whole. The stock price so suppressed – one only needs to look at the ratios..but once you take a dive and read the annual report, you can get a sense that the company is a lot more valuable and has great long term prospects. I will be staying invested in this company for years to come!

      R2R

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