LEV - Power Corporation: A 5.5% Yield And A Narrowing Discount To NAV

Summary

• POW continues to make progress in shrinking the gap between its share price and NAV, by streamlining assets and disposing of non-core assets.
• The company will use the proceeds from these dispositions to repurchase up to 5.4% of outstanding shares. This will be positive for the NAV discount and EPS.
• The company's strong underlying business and investment grade credit rating provide confidence in the 5.5% dividend.
• Returning cash to shareholders, shrinking the NAV discount and a valuation below historical average make this an attractive total return play.

Author’s note: All figures listed in CAD$ unless otherwise noted.

Investment Thesis

Since my last coverage of Power Corporation of Canada ( PWCDF ) ( POW:CA ) in April 2022 , the company has continued to execute on its strategy of streamlining its structure and focusing its portfolio to reduce the stock’s discount to NAV. These results are positive, however there are still opportunities for the company to use this lever to surface value.

POW is trading at a forward P/E of 9.4X, slightly cheaper than its long-term average P/E of 10.8X. The company has an investment grade credit rating: S&P: A+ (Stable), DBRS: A (Stable) and offers a growing dividend. Catalysts for further share price improvement include: narrowing the discount to NAV, organic growth in the underlying business and the repurchase of 5.4% of outstanding shares through the company’s recently announced NCIB. These factors combine for an attractive total return setup for 2023.

Over the past 10 months, POW has proven defensive with a total return of -2.65% compared to -6.45% for the S&P 500. This is due in large part to Power’s attractive 5.5% dividend yield. For a deeper look at POW's operations and associated risks, please see " Inflation Worries? Add Some Power To Your Retirement Income ".

Net Asset Value

Over the last few years, POW has completed several initiatives to simplify the corporate structure and streamline assets. These efforts have been successful in shrinking the discount between the share price and the company’s NAV from approximately 25% in 2022 to 22.2% as of Q3 2022. Reported NAV per share at the end of the last quarter was $39.38 compared to a share price of around $36. The NAV has likely moved up with the market over the past quarter.

Source: Power Corp

Over-Diversified?

Diversification is a generally a good thing in investing, especially within one’s own portfolio. For companies however, diversification can prove to be too much of a good thing sometimes. Conglomerate discounts on publicly traded companies in developed economies typically result in a 10%-15% discount in valuation for the company.

The array of POW’s holdings are truly staggering. In addition to publicly traded financials such as Great-West Lifeco Inc. ( GWO:CA )( GWLIF ) and IGM Financial Inc ( IGM:CA ), POW holds a interest in the already diversified Groupe Bruxelles Lambert SA ( GBLBF ). GBL itself is a complex company with a variety of publicly listed assets, private investments and alternative investments. GBL’s holdings including interests in household brands like clothing maker Adidas AG ( ADDYY ), and beverage giant, Pernod Ricard SA ( PDRDF ). Its breadth of industry involvement ranges from feminine hygiene products to seafood production and web services.

POW also has direct ownership of alternative investment platform, Sagard and its own energy brand of renewable energy infrastructure provider, Power Sustainable. Add on to these a number of fintech investments, including Wealth Simple. The unrelated nature of these assets warrants a conglomerate discount. I believe this discount can shrink overtime however, as the firm streamlines holdings and focuses the portfolio.

Narrowing the Gap

According to Dejardins, as of January 31, 2023, POW’s discount to NAV was 22.2%, down from 23.3% on December 30, 2022. As a holding company for a diverse array of financial and operating assets, the market has assigned POW a conglomerate discount. While POW’s underlying assets can contribute to the holding company’s returns by continuing to grow their businesses, POW can unlock value for shareholders by taking initiatives that move the share price closer to the firm’s NAV.

Source: Power Corp

Narrowing Transactions

Since 2021, POW has monetized over $1B of assets in an effort to surface value. In January 2023, POW announced it has sold its 13.9% ownership stake in ChinaAMC to Mackenzie Financial Corporation, a wholly owned subsidiary of IGM Financial for $1.15B. IGM's equity ownership in ChinaAMC is now 27.8%. POW has owns 64.9% interest in IGM, so its shareholders will still be able to participate in the company, however, the asset will be owned by one of POW’s publicly traded underlying assets rather than an unlisted private holding. This reorganization should offer analysts and investors more transparency on the firm’s NAV.

Source: Power Corp

In a separate transaction, IGM has sold its 15.2M shares of Great-West Lifeco to Power Financial Corporation for $552.7M. POW now owns 68.2% of GWL. These transaction follow the 2021 disposition of GP Strategies, POW’s investment in a talent management software platform and the merger of The Lion Electric Company ( LEV ) with Northern Genesis Acquisition Corp. (NGA). This reorganization helps to create a more transparent structure for POW shareholders and it furthers the company’s efforts to narrow the NAV Discount. According to RBC Capital Markets, POW has further opportunity to focus its organization through the disposition of non-core assets such as Lion Electric, LMPG, Peak Achievement Athletics.

Returning Cash to Shareholders

According to a January 2023 press release , POW plans to use the proceeds from recent disposition transactions to boost returns to shareholders:

Power Corporation expects to return a portion of the net cash proceeds from the transaction to its shareholders, after factoring in the purchase of Great-West Lifeco common shares, through share repurchases over time pursuant to a normal course issuer bid of Power.

This news not only returns cash to shareholders, but will also help to narrow the gap to NAV. With a double-digit dividend increase in 2021 and a current dividend yield of 5.5%, returning capital through share repurchases at discounted share prices will create more value for shareholders than another dividend increase at this time.

In 2022, POW repurchased and cancelled 11.1M shares for a total of $413M. On February 27, 2023 the TSX approved POW for an NCIB commencing on March 1, 2023 and ending on the earlier of February 29, 2024 to repurchase up to 30M shares, or approximately 5.4% of outstanding common shares. Separately, GWO is also pursuing share buybacks with the company recently announcing it has been approved to buy back up to 2.15% of common shares. In May, 2022 GBL had already executed one third of its approved NCIB to buy back €500M of shares. These moves should boost EPS at both the operational level and the hold-co level.

Note for U.S. Shareholders

Dividends from Canadian-listed stocks can generally be sheltered from the 15% withholding tax when held in U.S. retirement accounts. Please consult a tax professional if needed.

Investor Takeaways

The disposition of peripheral assets with proceeds used to buy back shares, coupled with other streamlining transactions will continue to surface value and improve visibility of the company's NAV. POW has demonstrated a propensity to return cash to shareholders through dividends and share buybacks. The company has a valuation below its historical average. These tailwinds layer on top of strong underlying business to make Power Corp an attractive total return play for 2023.

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