Power Corporation of Canada (TSX:POW) is one of those stocks you either love or hate. A perennial underachiever, many investors abandoned it long ago despite the fact that its annual dividend of $1.53 currently yields 5.0%.
I’m one of those observers who views Power Corporation with a modicum of respect given the assets it controls to one degree or another. It has a lot of unharnessed potential that could surface sooner than you think. Here’s why.
Lost in the 6.6% dividend increase announcement on May 11 was the fact that Power Corporation had record earnings in Q1 2018 — $525 million versus $269 million a year earlier — with a significant portion of the increase from the company’s private equity investments in North America and Asia.
Like all private equity investments, returns are generated primarily by the sale of companies it has invested in.
Power Corporation’s Sagard Europe economic interests vary; it has a 19.8% interest in Sagard II, a 748-million euro investment fund, a 37.3% interest in Sagard 3, and an 808-million euro investment fund. Those two funds generated $168 million of the company’s $227 million in investments unrelated to its controlling 65.5% interest in Power Financial Corp. (TSX:PWF).
While its private equity investments aren’t going to generate these kinds of returns every quarter, it does highlight the potential earnings power of the non-Power Financial investments.
Wealthsimple is a big part of the future
Another investment that’s carried under Power Financial’s banner but is really another independent investment vehicle like Sagard is Wealthsimple, the Toronto-based robo-advisor with $2.2 billion in assets under management in both Canada and the U.S.
To date, Power Corporation has invested $183 million in Wealthsimple for a 82% controlling position in the company. Ultimately, it could become as an important piece of the puzzle as Power Financial subsidiaries Great-West Lifeco Inc. (TSX:GWO) and IGM Financial Inc. (TSX:IGM). Thus, from where I sit, the $183 million investment carried on its books significantly underprices the fair value of Wealthsimple, something I stated in March could be worth billions over the next decade.
The M&A game
During Power Corporation’s annual meeting in May, co-CEO Paul Desmarais Jr. (the Desmarais family controls the company) suggested that it had $10 billion to invest over the next five years in the U.S. financial services industry.
Using its Empower Retirement subsidiary, the second-largest provider of defined contribution plans in the U.S., Power Corporation is keen to grow even larger. In addition, Power Financial CEO Jeffrey Orr believes that it will make an acquisition or two through its Putnam Investments asset management business.
I envision Power Corporation looking much different in five years’ time.
The bottom line on Power Corporation
Yes, Power Corporation has underachieved in recent years, but as Fool contributor David Jagielski said in April, the company’s managed to be consistently profitable and is currently generating greater free cash flow than it ever has.
There are poor stocks yielding 5% and there are good stocks like Power Corporation that will pay you 5% annually to remain patient. If you’re an income investor, I’m not sure how you can pass this up.