CI Financial Corp., one of the country’s largest investment managers, is slashing its dividend nearly in half in a move it said will improve flexibility amid intense competition across the Canadian wealth management industry.
The company announced the surprise cut in an earnings release on Thursday morning, saying it plans to use the money saved on dividends to help buy back up to $1-billion of its own stock over the next 12 to 18 months.
Though CI is struggling to reverse a growing net outflow of money from its funds, many of which continue to underperform the market, the shift from dividends to share repurchases is a primarily a strategic move based on a depressed share price, CI’s chairman Bill Holland said in an interview.
“Overwhelmingly, it’s in our best interest to buy our shares back at this price,” Mr. Holland said. “I own 9 million shares, I’m not in the business of doing something that makes the stock go down.”
The immediate reaction, however, was just that. Investors drove CI’s stock down by 4.2 per cent on the day, in keeping with a market that does not tend to look kindly on dividend cuts.
A new annual dividend rate of $0.72 per share, to be paid quarterly over the next six quarters, will draw the dividend yield down to about 3.1 per cent, which the company said is in line with the market average. Just prior to the cut, CI’s stock was yielding 6.1 per cent, which made it a candidate for income investors who considered the dividend safe.
But investors should come to view the change to capital allocation as a wise one, Mr. Holland said, suggesting there is currently no better use of cash flow than to repurchase what he sees as substantially undervalued shares. Share buybacks have the general effect of boosting a company’s stock price because they reduce the size of the public float.
CI’s stock is now down by 27 per cent from its 52-week high set in late January, which has shrunk the company’s price-to-earnings ratio to less than 9 times forward earnings estimates. Around four years ago, that trading multiple was higher than 20 times.
“We would never have put this dividend in place if we thought our shares would be trading at these levels,” Mr. Holland said, adding that the company is sticking to its strategy of returning all free cash flow, and then some, back to shareholders.
Prioritizing buybacks makes sense as long as the stock remains attractively priced, Mr. Holland said. “We’re in a category that’s really out of favour right now.”
The traditional mutual fund business has been under increasing pressure from regulatory changes, competition from exchange traded funds, the rising popularity of low-cost passive funds and an industry-wide decline in fees.
For years, steep management fees made mutual funds cash-flow machines.
But investors have become increasingly sensitive to fees as regulators have forced greater fee disclosure by fund companies and as ETFs have come to offer lower-cost alternatives.
Mutual fund providers have had to cut fees in response to the competitive threat — last week CI announced fee reductions on 33 of its funds.
At the same time, the company is spending more. CI recently said it is targeting 4-per-cent annual growth in selling, general and administrative expenses, partly as a result of investments in product development and innovation, such as improving website and mobile access, and exploring longer-term initiatives in artificial intelligence and big data.
“We’ve been restructuring this company to compete in this challenging environment and building CI Financial for long-term success,” CI’s chief executive officer Peter Anderson said on call with analysts on Thursday to go over the company’s second-quarter financial performance.
Though quarterly earnings of $0.61 per share came in slightly ahead of analyst forecasts, the larger concern is the acceleration of net redemptions amid below-market returns in several of the company’s large mutual funds.
In 2017, CI’s Canadian business saw $1.5-billion in net outflows — a sum that rose to $4.1-billion in the first half of this year alone.
“We are very disappointed in our Q2 net sales results, and our highest priority in the company is to return to positive net sales,” Mr. Anderson said, while declining to speculate on when that turnaround might happen.
The company has pointed to a conservative approach to equities and limited exposure to high-flying U.S. tech stocks as one reason for underperformance by many of its portfolio managers.
These challenges are not unique to CI. Among Canadian equity funds, more than 90 per cent of fund managers failed to beat the S&P/TSX Composite Index over the last 10 years, according to Standard & Poor’s SPIVA Scorecard rankings, which show mutual fund returns up to the end of last year.
And nearly none of the Canadian fund managers investing in U.S. stocks beat the S&P 500 Index over the same period. The bull market has been a tough one to beat. In the more than nine years since the S&P 500 bottomed out in March, 2009, the index has posted an average annual return of 16.5 per cent.
But CI’s net redemptions are showing signs of slowing, Mr. Holland said. “The trend is improving. But in order to get back to robust net sales, we need to have a turn in the market that favours stocks that are more fairly valued.”
Tim Shufelt