Power Financial (TSX:PWF) reported record second-quarter results August 3 which included a 6% increase in earnings per share to $0.92 from $0.87 a year earlier.
That might not seem like a big deal, but given Power Financial’s operating subsidiaries — Great-West Lifeco Inc., Putnam Investments, and IGM Financial Inc. — are all facing secular changes in their respective segments of the financial services arena, the record performance was significantly better than analyst expectations, yet investors have given it and its parent Power Corporation of Canada (TSX:POW) very little love since then.
Why is that?
Holding company discount
Is it better to buy a holding company’s stock or that of its publicly traded operating subsidiaries?
Most experts would go with the operating subsidiaries, because it’s widely believed that investors value holding companies like Power Corporation at a discount.
Although Power Corporation owns 65.5% of Power Financial, investors value the majority ownership at less than the implied market value of that ownership. So, 65.5% of Power Financial would be worth $14.3 billion in the hands of an individual — $2.2 billion more than Power Corporation’s entire market cap.
Yet Power Corporation owns plenty of other assets that generate profits for the company that get little or no value as a result of that discount.
Fool contributor Ryan Vanzo did a good job explaining the holding company discount in a 2015 article about the company. You might want to read it to get a better understanding of why value investors are attracted to Power Corporation’s stock in the first place.
Why I like Power Corporation
Although I’m not a big dividend investor, its 5.3% yield is desirable, especially when you consider that it’s grown the dividend paid out by 26% over the past three-and-a-half years.
To pay those dividends, a company uses cash flow to do so. In 2017, Power Corporation generated $6.9 billion — the most in a decade. Although its cash flow in the first six months of the year was 9% less than in the same period a year earlier at $2.6 billion, it will have plenty to invest in new businesses after paying out approximately $680 million in dividends for the entire fiscal year. Power Corporation is a cash flow machine.
Power Corporation operates some private equity funds including Sagard Holdings (North America focus), Sagard Europe, and Sagard China. Operating the private equity business since 2002, the company has invested $1.7 billion in the three geographic areas, received $957 million in distributions, and is sitting on a portfolio of investments worth $2 billion.
While its Chinese private equity funds have delivered a good return on investment, its European and North American investments (the oldest) haven’t performed nearly as well. That being said, Sagard, along with its investment in China Asset Management Corporation and its other smaller hedge-fund investments, generated $212 million in income in the first six months of the year — 144% higher than a year earlier, demonstrating that private equity investments tend to be cyclical and require patient capital.
The Desmarais family, who control Power Corporation, are the most patient of investors.
As I’ve said in previous articles, it is the company’s FinTech investments, including Wealthsimple, that hold the greatest promise. To date, the company has invested $193 million in Wealthsimple, a company that’s revolutionizing asset management for average Canadians who don’t want to pay the high fees of a full-service financial advisor but desire professionally managed investments.
Wealthsimple could be the biggest diamond in the rough given its expansion into the U.S. Five years from now, $193 million will seem like peanuts.
The bottom line on Power Corporation stock
It’s easy to understand why very few investors want to own its stock, but for those who like solid dividends and have a bit of a contrarian streak in them, I see the next three to five years being good ones for the company, despite the headwinds Power Financial faces.
At $29, I don’t see much downside, and you get paid 5% to wait for investors to come to appreciate the company’s various assets.
And if it doesn’t happen, at least you can bank the healthy dividends.