The Motley Fool

Why I Wouldn’t Touch Power Corporation of Canada

Power Corporation of Canada (TSX:POW) is a diversified Canadian holding company which has over $1.4 trillion worth of assets under management. The company owns some old businesses that are depreciating by the day, and although the stock looks cheap right now, it’s actually a value trap that could hurt investor’s returns over the long term.

A complex business ownership structure: what’s inside?

It’s not a mystery that Power Corporation is a big, complex web of businesses that it owns partial stakes in. It can be confusing to investors looking to invest in the company, but I can tell you right now that some of the companies are not where you want to put your hard-earned dollars. Such businesses include mutual fund sales and newspaper publications, both of which are slowly dying as the years go on.

The company has a 65.6% stake in Power Financial Corp. (TSX:PWF), which is directly exposed to the poisonous IGM Financial Inc. (TSX:IGM).

IGM Financial is a financial services company which specializes in the sale of overpriced mutual funds through its subsidiaries Mackenzie Funds and Investors Group. IGM Financial’s subsidiaries offer actively managed mutual funds for ridiculously high management fees. Canadians pay the highest mutual fund fees in the world, and IGM Financial’s mutual funds commanding 3% MERs are not helping the situation.

Going forward, there will be regulation put forth on companies which sell mutual funds. There’s a clear conflict of interest right now, as advisors are considered mutual fund salespeople who couldn’t care less about the well-being of the investor. No mutual fund should command an MER of 3%, and if investors really knew what they were getting themselves into, they would think twice about buying overpriced, underperforming mutual funds from IGM Financial’s subsidiaries.

IGM Financial is one of the biggest value traps on the TSX today, and everyone who owns a stake in it is also in danger of experiencing a huge top-line hit over the next few years as mutual funds slowly become a relic of the past.

Power Corporation also owns 100% of Square Victoria Communications Group, which owns Gesca Limitée, which publishes the La Presse French Canadian newspaper. There’s no question that newspapers are becoming ancient history as more readers switch to computers and tablets as the medium they use to get their news.

There are many other great international businesses under the Power Corporation umbrella, but IGM Financial and Square Victoria Communications Group should be reasons to stay out of the stock, no matter how cheap it is. IGM Financial’s business model will lose a ton of earnings under new mutual fund regulation rules, and newspapers shouldn’t be something you put your money into this year.

Dividend raises? Look elsewhere

The stock trades at a 15 price-to-earnings multiple, which is higher than its five-year historical average multiple of 12.5. The dividend is also quite high at 4.4%, but I wouldn’t touch it, as the company has gone as much as six years without raising its dividend. Going forward, it will be nearly impossible to get dividend raises considering the company is invested in some questionable businesses that will cause its earnings to nosedive.

The company owns stakes in value traps, so it’s safe to say that Power Corporation is also a value trap itself. I wouldn’t touch this stock no matter how cheap it gets.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any stocks mentioned.

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