Power Corporation of Canada (TSX: POW) is a diversified international management and holding company with interest in companies in the financial services, asset management, sustainable and renewable energy, and other businesses in North America, Europe and Asia. The group was incorporated in 1925.

Organizational Chart

Source: Company Website

Investment Rationale

A High Yielding Consistent Dividend Paying Company: In the stock market, investing in high dividend-paying stocks like Power Corporation of Canada are tend to be popular within the investor’s community, and for a good reason - some research work based on historical return suggests a significant amount of all stock market returns come from reinvested dividends. With Power Corporation of Canada yielding 6.7% and having paid a dividend for over ten years, many investors likely to find the company quite interesting. It would not be a surprise to discover that many investors have bought it for the dividends. The group’s dividend recorded a three-year CAGR of 9.8% and a five-year CAGR of 8.43%.

Delivered Solid Return to Shareholders Over the Last 10-years: Over the past ten years, Power Corporation paid approximately CAD 6 billion in dividends and delivered a 54% growth in dividend per share at the same time. Further, CAD 100 invested in Power Corporation shares ten years ago have turned out to be CAD 1,822 by June 30, 2020, which implies a total return of 1722% over ten years, and of which CAD 1,196 represents the reinvestment of dividend received. Further, on an average POW’s shares outperformed the broader S&P/TSX by 2.8% in each year of the past 10-years.

Source: Company Website

Insiders are increasing the stake: The recent purchase by Michel Plessis-Belair (Co-Vice Chairman, Power Corp of Canada),  Robert Orr (President, Chief Executive Officer, Director at Power Corporation of Canada) and Jocelyn Lefebvre (Managing Director - Power Financial Europe B.V) was the biggest purchase of Power Corporation of Canada shares made by an insider in the last twelve months, according to the data retrieved from Thomson Reuters. Further, nine out of eighteen insiders have increased their stake in the company. This reflects that insiders have bucked the lower stock prices to purchase shares, and this also shows that they are bullish about the company.

Trading at Discounted Valuation: From the LTM Price to Book Valuation standpoint, shares of POW trading at a discounted multiples to its peers, as LTM Price to Book Value Per Share of the Company stood at 0.86x, whereas peer’s average PB (x) multiple stood at 1.38, which implies a discounted valuation of approximately 37%. Therefore, Power Corporation is offering a value investment deal for the investors with high dividend yield amid falling interest rate environment.

Bullish Price Trend: At the last closing, its shares cross-over its long-term resistance level of 200-day SMAs and more importantly managed to close above it, which implies that the stock has created a long-term support level and entered into a bullish price zone. Further, its shares have traded above the 5-day, 10-day, 20-day, 30-day, and 50-day SMAs, which is another bullish indicator. Moreover, the leading momentum indicator 14-day and 9-day RSI is hovering in neutral territory and tilted towards the overbought, which reflects further headroom for a price increase from the current trading level.

Source: Refinitiv (Thomson Reuters)

Risk Associated to Investment: The group is exposed to next wave of COVID-19 outbreak as it would have an impact on the capital market, and the group is exposed to the risk of volatility in the capital market.

2QFY20 Financial Highlights

Source: Company Filing

• The company had a very strong quarter across the group from a financial results point of view.
• For the three months ended to June 30, 2020, Net earnings attributable to participating shareholders were CAD 666 million or CAD 0.99 per share, compared to CAD 278 million or CAD 0.64 per share in the previous corresponding period (pcp).
• The Board of Directors declared a quarterly dividend of CAD 0.45 per share, up 10.5% from 2Q19.
• The Corporation’s net asset value per share stood at CAD 32.96 on June 30, 2020, compared to CAD 30.79 at March 31, 2020, representing an increase of 7.0%.
• On June 29, 2020, Great-West Lifeco Inc.’s (Lifeco) subsidiary, Empower Retirement, announced that it has entered into an agreement to purchase Personal Capital Corporation, a hybrid wealth manager that combines a leading-edge digital experience with personalized advice delivered by human advisors.
• Lifeco’s consolidated assets under administration were CAD 1.7 trillion at June 30, 2020, a 9.1% increase from March 31, 2020, primarily reflecting the market recovery.
• IGM Financial Inc. (IGM) assets under management at June 30, 2020, were CAD 165.4 billion, an increase of 12.1% from March 31, 2020.
• Total net sales at IGM were CAD 3.4 billion, compared to net redemptions of CAD 544 million in the second quarter of 2019. Investment fund net sales were CAD 864 million, compared to net redemptions of CAD 364 million in the second quarter of 2019.
• On August 4, 2020, Lifeco announced that an agreement had been reached to sell its Canadian subsidiary, GLC Asset Management Group Ltd., to Mackenzie Financial Corporation, a subsidiary of IGM. This transaction is expected to close in the fourth quarter of 2020 and is subject to regulatory approval.
• During the quarter, Power Corporation included in Corporate Knights 2020 ranking of Best 50 Corporate Citizens in Canada.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 31.08% of the total shareholding. Desmarais Family Residuary Trust. and CI Investments Inc. hold the maximum interests in the company at 7.8% and 3.8%, respectively. The institutional ownership in the POW stood at 32.50% and strategic ownership stood at 12.86%, respectively.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): Price to Book Value Based Valuation Metrics

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation

The group delivered a decent quarterly result on the back of solid performance from the companies’ in which the group has an investment. The group has a strong balance sheet and resilient business model, leading market positions, and extending and enhancing client engagement in a challenging environment. Further, despite a challenging financial quarter, the group continued to invest and grow during this period, i.e. Empower Retirement’s acquisition of Personal Capital, Mackenzie’s acquisition of GLC Asset Management. Ongoing investments by operating companies to enhance client offerings, digital capabilities, and profitability is likely to boost the group’s financial performance.

Further, the group has a proven track record of dividend payment over the past 10-years, which is a key positive from an income investor’s point of view. At the last traded price, the stock was offering a dividend yield of 6.7%, which is lucrative considering the current interest rate environment.

Moreover, at the last closing, its shares cross-over its long-term resistance level of 200-day SMAs and more importantly managed to close above it, which implies that the stock has created a long-term support level and entered into bullish price zone.

We have valued the stock using Price to Book Value based relative valuation and arrived at a lower double-digit upside potential (in % terms). Hence, based on the above rationale, we have given a “Buy” recommendation on the stock at the closing price of CAD 26.56 on September 21, 2020.

1-Year Price Chart (as on September 21, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

 

*Recommendation is valid at September 22, 2020 price as well.

* Please be aware dividend is variable and not guaranteed.

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Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.