Once upon a time, shareholders of financial services conglomerate Power Corp. of Canada and subsidiary Power Financial Corp., could count on two things from their annual meetings: a chart showing years of steady dividend increases, and a boring speech from Power CEO Paul Desmarais Jr. Now all they get is the boring speech.
The Powers are among the last publicly traded Canadian financial services firms that haven't increased their dividends since the onset of the financial crisis six years ago (the other is Sun Life Financial Inc.). The widow-and-orphan brigade isn't exactly suffering: They both yield around 4 per cent and can claim bragging rights for not slashing their dividends during the crisis, unlike Manulife Financial Corp. But with fellow Canadian insurers Manulife and Industrial-Alliance Insurance and Financial Services Inc. recently joining the banks in raising their dividends, it's fair to ask when the Powers will follow suit. The answer is, not soon, but maybe in late 2015.
To figure out when the Powers will raise dividends, we have to dig down a level and look at their two main assets, controlling stakes in fund manager IGM Financial Inc. and insurer Great-West Lifeco Inc. The good news, according to a recent note from RBC analyst Geoffrey Kwan, is that IGM, known for its Mackenzie and Investors Group brands, looks set to announce a dividend increase in early 2015. But even if its dividend grows to $2.22 next year from $2.15 now, as Mr. Kwan forecasts, and even if that directly flowed to Power Financial shareholders as dividends, it would only amount to three-10ths of a cent per share per quarter.
The bigger story is Great-West, which accounts for about three-quarters of Power Financial's net assets and a similar share of earnings. As goes the Great-West dividend, so goes the Powers', and the former also hasn't budged since early 2009. Like many insurers, Great-West has not had a great run since the crisis, as low interest rates have dampened returns. But it has also been held back by its August, 2007, purchase of U.S. fund manager Putnam Investments LLC. Troubled Putnam had $193-billion (U.S.) in assets under management just before Great-West Life bought it. Those assets shrank by almost half over the next 18 months, before gradually rebounding. It now has $159-billion under management but is still losing money, which it shouldn't be given its size and the improved state of the U.S. fund business. Great-West's U.K. business is also challenged due to a change in death tax rates that is affecting its annuity business.
With its ho-hum earnings growth, Great-West's ratio of dividends to net earnings stands at around 50 per cent, down from an uncomfortably high 71.5 per cent in 2009. Though it has no stated dividend payout policy, that's high compared with other insurance companies – Sun Life is in the 40s, Industrial-Alliance and Manulife are in the 30s. So when might Great-West raise dividends? Look for that to happen if it can reduce that ratio to the low 40s, analysts say.
"Based on our forecast, it doesn't look like that will happen until later in 2015," said Barclays analyst John Aiken. That's his "mostly likely case scenario," which would translate into dividend increases for both Powers around mid-2015. Unless, of course, some other crisis rolls around.