IGM Financial Inc.: The Value Trap Continues

Although shares of IGM Financial Inc. (TSX:IGM) look cheap, investors need to remain diligent.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Over the past six months, shares of IGM Financial Inc. (TSX:IGM) have traded sideways while continuing to pay a quarterly dividend of $0.56 per share. Patient investors have not been very well rewarded as shares have experienced a total price declined close to 25% over the past decade. Over the past five years, shares have performed no better than increasing in value by 5%.

IGM is a diversified financial services company which controls Investors Group and Mackenzie Investments. What was previously a fantastic business model during the peak in popularity of Canada’s mutual fund industry has turned into a problem waiting to happen.

The company’s stock, which currently trades at a price slightly above $41, offers investors a dividend yield of more than 5.5%. While this may seem like a fantastic deal at face value, it’ll look even more attractive if we keep going. The company is currently trading at a trailing price-to-earnings (P/E) multiple of no more than 12.5 times. Again, things may seem attractive to investors, but this could potentially be a situation when retail investors make the mistake of buying while investment professionals continue to avoid the name. Clearly, the professionals have done a lot more due diligence before choosing to invest or not.

To look behind the curtain, we have to consult the financial statements. Given that the company has a focus on mutual fund sales, the first metric to consider is top-line revenues, which has been almost flat for the past two fiscal years. Following revenues, we subtract the cost of goods sold and arrive at the gross margin, which, over the past four years, has shrunk from 65.9% to 62.9%. Although 3% may not seem like a substantial amount, the tightening of revenues and expenses is actually a major challenge faced by all competitors in the financial services industry.

The bottom line: earnings per share (EPS), have not increased substantially over the past four years. For fiscal 2013, EPS were $3.02, which declined to $2.98 the following year before rebounding to $3.11 in 2015 and $3.19 in fiscal 2016. The dividends paid over this same period have continued to increase. From $2.15 in fiscal 2013 to $2.25 in 2016, shareholders have not seen a high rate of growth in the income shared with them, yet the dividend-payout ratio has remained very high during this period. What was a payout ratio of 71% in 2013 has become 70.5% for 2016.

Although the dividends per share increased due to a consistent payout ratio, it is important to note that it was due to no more than a share buyback. As interest rates have remained low for quite some time, the company has increased long-term debt by more than $2 billion to shrink the share count. The result has been higher earnings per share and a dividend-payout ratio which went nowhere. Effectively, the company experienced no material increase in earnings but has been able to show an increase due to a shrinking share count.

Investors may need to be very careful with this name as financial engineering can only go so far. As interest rates rise, the company (and shareholders) may have no other choice but to face the music and cut the dividend. Only time will tell.

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 Ryan Goldsman has no position in any stocks mentioned.

More on Dividend Stocks

Canadian stocks are rising
Dividend Stocks

3 Ways to Invest in Canadian Real Estate Under $20

Real estate can be a great way to make passive income, but you certainly don't have to invest a lot…

Read more »

grow dividends
Dividend Stocks

TFSA Wealth: 2 Oversold Canadian Stocks for a Retirement Fund

These top TSX divided stocks look attractive today for TFSA investors.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Create $1,487 in Passive Income From a Top TSX Dividend and Growth Stock

This top growth stock on the TSX today could bring in almost $1,500 in passive income and triple your investment…

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Renters Will Rise in Number vs. Homebuyers in 2022

The greater majority of Canadian renters doubts their ability to purchase a home in 2022 due to surging inflation and…

Read more »

Man holding magnifying glass over a document
Dividend Stocks

West Fraser Stock: A Sneaky Growth Stock No One Talks About

West Fraser (TSX:WFG)(NYSE:WFG) stock has been a sneaky growth stock when it comes to its dividend.

Read more »

Dividend Stocks

Inflation Investing: 2 Top TSX Dividend Stocks to Buy Now

TFSA income investors can get dividend yields of better than 6% to help offset the impacts of high inflation.

Read more »

Canadian Dollars
Dividend Stocks

Got $1,000? Invest it in Real Estate

If you've got an extra $1,000, you should check out cheap REITs like Allied Properties (TSX:AP.UN) for juicy income.

Read more »

Community homes
Dividend Stocks

Real Estate: 2 Top Dividend Aristocrats to Own Today

The recent correction in the real estate sector has made several real estate stocks like these two attractive to income-seeking…

Read more »