Power Corp. of Canada and two of its publicly traded entities announced that they will buy back a massive swath of their own shares, sending share prices higher but raising the question of what the announcement means for future acquisitions.
Power Corp., a holding company that has a 65.5 per cent stake in Power Financial Corp., will repurchase as much as $1.35-billion worth of its own shares, representing about 10 per cent of the current value of the company.
Power Financial will repurchase up to $1.65-billion worth of its own shares, and Great-West Lifeco Inc., a subsidiary of Power Financial, will buy back up to $2-billion worth of its shares.
“We believe that the bid to repurchase the corporation’s shares in the current market environment is an opportune use of our capital resources,” Paul Desmarais Jr., Power Corp.'s chairman and co-chief executive officer, said in a statement.
The stock market appeared to agree. Power Corp. rose 2.4 per cent, Power Financial rose 1.1 per cent and Great-West Lifeco rose 1.7 per cent on Monday – a day when the S&P/TSX Composite Index retreated 0.2 per cent.
Analysts sounded upbeat about the buybacks, which tend to boost profits on a per-share basis since profits are spread among fewer outstanding shares.
Paul Holden, an analyst at the Canadian Imperial Bank of Commerce World Markets, expects that Great-West Lifeco’s buybacks will boost the insurer’s earnings per share (EPS) by 2 to 3 per cent.
Gabriel Dechaine, an analyst at National Bank Financial, noted that Great-West Lifeco’s strong balance sheet, which includes cash, regulatory capital and untapped debt capacity, has held back the insurance firm’s growth and shareholder returns.
“As such, the decision to step up buyback activity should be viewed as a positive,” Mr. Dechaine said in a note.
Buybacks are by no means unusual. Goldman Sachs estimates that S&P 500 companies will direct 31 per cent of their cash toward buybacks in 2019, the highest level since 2007 and above what companies will spend on either dividends, acquisitions, or research and development.
Yet the debate over whether buybacks are an efficient use of capital is being debated in the United States right now. U.S. senators Chuck Schumer and Bernie Sanders, for example, argued recently that the explosion of stock buybacks suggests that companies are obsessed with maximizing shareholder returns at the expense of their own long-term strength.
However, buybacks tend to be well-received by investors. The S&P/TSX buyback index, which tracks the 50 Canadian stocks with the highest buyback activity, has gained 16.6 per cent over the past two years, easily outperforming the benchmark S&P/TSX Composite Index’s 9.5 per cent return (with dividends) over the same period.
In the case of Power Corp., Power Financial and Great-West Lifeco, the buyback plan stands out because of the size of the planned repurchases relative to the number of outstanding shares. It also follows a period of uncertainty for the trio of linked companies, which had weighed on the stocks, leaving many long-term investors wondering how the companies can revive their fortunes.
After a period of expansion and heady growth in the decade prior to the financial crisis, Power Financial’s share price has drifted sideways over much of the past 10 years amid significant headwinds facing the insurance and wealth-management industries, such as stubbornly low interest rates and compressed fees.
Power Financial’s share price touched a six-year low of $25.21 on Dec. 21. As a result of the slump, the stock’s price-to-earnings ratio, a measure of valuation, declined to just 9 – its lowest level since the depths of the bear market in 2009. The stock has since rebounded 17 per cent from its December low.
The question now is whether the buybacks will affect the companies’ simmering appetite for acquisitions. The official answer is no; Mr. Desmarais said that Power Corp.'s buyback plan leaves the company with “the financial resources required to pursue its strategy for long-term value creation.”
Similarly, Jeffrey Orr, Power Financial’s CEO, said in a statement that the buyback “will return capital to shareholders while maintaining Power Financial’s strong capital position to fund future growth opportunities.” He told The Globe and Mail in January that the company is aiming for a significant acquisition in the United States, where it controls global asset manager Putnam Investments.
But given the gains in share prices on Monday, investors seem to like the idea of buybacks. Whether they’ll embrace a big deal is another issue.
David Berman