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.
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 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.
- 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.
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.
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.
- Power Corp Fact Sheet & Overview
- Power Corp 2014 Annual Report
- Canadian Insurance Industry Risks & Opportunities
- Power Corp Wiki page
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.