Billionaire Paul Desmarais' Power Corp. of Canada and its subsidiary, Power Financial Corp., used to live up to their names by powering up their dividends every year. Those hikes stopped when financial markets melted down in 2008 and aren't likely to resume any time soon. But yield-seeking investors looking for a jolt should consider adding some Power to their portfolios: The dividends may not be growing, but they are compellingly valued nonetheless.
Power Corp. is a holding company that has as its main holding a 66-per-cent share in Power Financial, another holding company. Power Financial, in turn, controls insurance giant Great-West Lifeco, mutual fund giant IGM Financial Group (operator of the Investors Group and Mackenzie funds). It also owns a 28-per-cent stake in Pargesa Holding SA, a European investment company that owns stakes in such continental stalwarts as Lafarge, Total and Pernod Ricard.
The Powers' dividends largely depend on dividends from publicly traded Great-West and IGM. Dividend growth there has stopped as well, and neither has been a compelling investment for some time. Low interest rates and weak markets are bad for insurance company profits; Great-West compounded the problem by purchasing U.S. mutual fund giant Putnam in August of 2007 at just the wrong time. Since the acquisition, Putnam's assets under management have dropped by 31 per cent (to $127-billion U.S. as of Sept. 30) and investors have pulled out a cumulative $41.3-billion in assets.
Net redemptions and weak returns have also bedevilled IGM; it ended the third quarter with slightly lower assets under administration – $119.3-million – than it had at the end of 2006. The business recently trimmed management fees to slow redemption rates. That lowers potential revenues, but still leaves IGM charging among the highest fees in the business.
These challenges aren't going away, which means earnings growth will be muted and dividend hikes unlikely in the Power family for the foreseeable future. That's the bad news.
The good news is that there is still value to be had for investors. By historical standards Power Financial is undervalued; it trades at an 11-per-cent discount to its net asset value, compared with a five-year average of 8.5 per cent and a 10-year average of 8 per cent, CIBC analyst Paul Holden says.
Even better, it turns out those stagnant dividends are not so bad after all. Power Corp. pays 29 cents a quarter and Power Financial pays 35 cents, representing yields of about 4.8 per cent and 5.4 per cent, respectively. While IGM and Great-West aren't exactly rock stars, their dividend-paying abilities are not in any danger.
Conservatively managed Great-West has held up well through the recent financial turmoil, while Mr. Holden assigns a very low probability that IGM could cut its dividend. It may be a while before investors see meaningful capital returns from Power stocks, but at least they'll be paid handsomely to wait.
Sean Silcoff