PWCDF - Power Corporation: Dividends With A Discount To NAV

2023-12-26 05:56:19 ET

Summary

• Power Corporation is a financial services conglomerate in the insurance, asset management, and wealth management space.
• The company has been undertaking a series of steps to narrow the discount to NAV.
• Power Corporation offers investors a way to get a safe 5.6% yield while you wait for the NAV discount to close.

Please note all $ figures in , not , unless stated otherwise.

Introduction

I'm nowhere near the age of retirement, but I can't deny that I love a good dividend paying stock. Dividends are great because they provide investors with stable, re-occurring streams of income paid out from the company's cash flows. For retirees in particular, dividends can be a great way to boost retirement income and avoid dipping into their principal.

When I think of dividend stock, I think of Power Corporation, which was the first stock I bought almost 5 years ago. Power Corporation is a holding company of sorts, owning various life insurance businesses, asset management companies, and financial services companies.

Through its Power Financial division, this includes a 68.2% stake in Great-West Lifeco Inc. ( GWO:CA ), a 62.1% stake in IGM Financial Inc. ( IGM:CA ), and a 15.5% stake in Groupe Bruxelles Lambert (GBLBY). As indicated by the tickers, these three companies are publicly traded companies, meaning their values are publicly available and knowable based on their market prices. Even within these businesses, they own other notable investments like IG Wealth Management, Mackenzie Investments, and Canada Life. As you can probably guess, the Power Financial division encompasses many different types of financial services and asset management businesses in North America and Europe. Collectively, these businesses represent 85.9% of gross asset value. The remainder of the NAV includes alternative asset investment platforms as well as standalone businesses and other assets.

For the alternative asset investment platforms , this includes its ownership of Sagard, which has interests in venture capital, private equity, private credit, royalties, real estate, and also offers private wealth management services. Sagard has $15.7 billion of AUM. Power Corporation also owns Power Sustainable, which takes care of the company's sustainable investments . This includes everything from renewable energy infrastructure, agri-food businesses, and sustainable infrastructure credit.

Finally, the remaining businesses include a few Fintech platforms. This includes WealthSimple, Personal Capital, and Portage Ventures. Collectively, they make up a relatively small portion with respect to the company's NAV, but it's worth mentioning just to illustrate the company's expansive diversity in its financial services offerings.

Net Asset Value

As a conglomerate with stakes in several businesses, I think it's probably best to value Power Corporation on a NAV basis. To compute the NAV per share, one essentially takes the total assets of the corporation and deducts any liabilities, before dividing by the share price to get the per-share value. With three public companies making up a substantial portion of the company's investments, these are knowable values we can compute to get a good gauge of what Power Corporation could be worth.

At quarter end, these businesses were worth about $32.02 billion and the company had $5.6 billion of liabilities and preferred shares. Based on my calculations, applying the percent ownership weights to the current market capitalization of these companies (and converting the GBL stake at an exchange rate of EUR/CAD of 1.42), the current value of these businesses are worth $32.45 billion, a slight increase as the market capitalizations have collectively increased subsequent to the quarter.

Deducting the $5.6 billion of preferred shares and liabilities, and adding $1.48 billion of cash, this suggests a value for the parent company of $28.83 billion before adding any of fintech or alternative asset investment platforms that Power Corporation owns. With the current market capitalization of the company at $24.62 billion , this suggests that the market is applying a pretty substantial conglomerate discount to Power Corporation. With a $4.21 billion gap between the market cap and this computed figure, even before adding any of its private investments, this suggests a pretty substantial discount to the NAV.

By its own calculations, Power Corporation estimates that its current discount to NAV is around 25%. Historically, the company traded at a 34% discount from 2015-2018, but over time, the company has taken a series of steps to narrow the gap in order to create shareholder value. This has included various M&A transactions at the operating company level but also returning capital to shareholders at the holding company level.

For the 2023 year, Power Corporation has done over $3.5 billion in transactions in an effort to narrow the discount. This has included the Webhelp combination with Concentrix, an acquisition by IGM to acquire Rockefeller Capital, and the sale of Putnam to Franklin Templeton, which unlocked the value of Putnam in exchange for shares in Franklin Templeton.

While the NAV discount hasn't closed much in 2023, I think these transactions highlight the M&A levers available on the operating company front in order for Power Corporation to unlock value. On its Q3 earnings call, when asked about the company's NAV, CEO Jeffrey Orr had this to say:

So how -- feeling about the discount is not great is the honest answer. But it is what it is, so. And these things jump up and down. So, that doesn't in any way diminish our conviction and enthusiasm to lower that discount over time. We're enthusiastic also to buy shares back. And the cash is a little bit lower as we've been active in the last several months buying shares back. So, we're going to continue to look at share buybacks as one of the key tools to arb the discount and to lower the discount and create NAV. Of course, as we buy shares back at a discount, you're actually increasing the NAV as you do so.

In my view, with its cash balance that should grow as the company generates more free cash flow, I believe the company will be in a better position to do buybacks. Even at the holding company level we are seeing buybacks too, with GBL purchasing €589 million worth of share buybacks so far for 2023 with an additional buyback envelope of €500 million announced. Great West Life has also been consistently buying back shares with a 20 million share buyback program announced in January 2023, a continuation of the 20 million share buyback announced in January 2022 . I fully expect an announcement early next year for the same amount.

Valuation

We've discussed NAV, but I think it'd be helpful to look at the P/E ratio for Power Corporation. At present, Power Corporation trades at a P/E ratio of 14.7x. Over time, the company's P/E ratio has ranged from 7x to about 19x so we're a little bit ahead of the median and average multiple over this time period.

Based on the 6 equity research analysts with one-year target prices for Power Corporation, the average target price is $40.00, with a high estimate of $44.00 and a low estimate of $38.00. From the average, this implies one year upside of 6.41%, not including the current dividend of 5.6%, which suggests analysts are relatively constructive on Power Corporation's shares.

When it comes to risks to valuation, Power Corporation is exposed to interest rate risk, being a major player in the financial services industry. Through its stake in Great-West Life, which engages in insurance products that expose it to underwriting, investment, and interest rate risk, it can be difficult to monitor Power Corporation's overall risk exposure, so it's important to monitor the performance of these businesses too going forward. Finally, through IGM, the company does face pressure being in the asset management business from competitors who offer lower-priced passive products, a trend we've increasingly seen in the asset management space.

Conclusion

While I don't think you'll get rich owning Power Corporation's stock, I think it can be a great way to get a safe 5.6% dividend while you wait for the gap in NAV to close. Power Corporation has been taking steps at the holding company level and at the operating company level to realize transaction value from M&A and by buying back shares. Investors shouldn't expect much capital appreciation, but I would rate the company's shares as a buy today if you're looking for steady dividends to add to your portfolio.

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