Power Corporation of Canada (TSX: POW) is a holding company that has endured a conglomerate discount for years, yet continues to generate respectable shareholder returns through growing dividends and regular share repurchases. Passive income-oriented investors could load up on POW stock, earn a 5.2% dividend yield, participate in the Canadian dividend aristocrat’s growth plans, and enjoy some capital gains as the holding company grows its net asset value.
Power Corporation of Canada is a $25.6 billion Canadian financial services powerhouse that holds controlling stakes in Canada’s largest non-bank asset manager IGM Financial, a controlling interest in insurance conglomerate Great-West Life, and two large alternative investing outfits while holding onto a dividend-earning investment in Groupe Bruxelles Lambert (GBL) – a European holding company that recently raised dividend payouts by 80% for 2025.
Since Power Corporation’s reorganization was announced in December 2019, the company has vastly refocused its mandate on financial services, improved operating efficiencies for its holding companies, raised dividends by 38.9%, generated an 86% total return for shareholders over the past five years, and been repurchasing its outstanding shares consistently over the past four years.
However, POW stock’s adjusted net asset value per share was $50.24 on August 8, 2024 while shares traded at prices under $37 that day. Although the stock has since gained bids above $42 at writing, the valuation discount still remains.
Dividend dynamo: Why POW stock shines for income seekers
Power Corporation stock is a proven dividend aristocrat that has raised dividends for nine consecutive years now and averaged a 7.9% dividend growth rate over the past three years. The dividend, which yields 5.2% annually, is well covered by recurring earnings given a 50.5% payout ratio.
Given its sustained free cash flow generation, POW stock could continue enhancing investor returns through dividend raises and stock repurchases. Share repurchases have been ongoing for four years now. Power Corporation reduced outstanding shares by 3.5% over the past four years and could continue on this accretive path as long as the deep discount on POW stock’s net asset value continues on the market. The company repurchased $189 million worth of its shares during the first half of this year.
Share buybacks mean the company’s remaining shareholders will earn higher dividends per share from investees each year, and management could pass these onto shareholders.
Unlocking growth: Power Corporation of Canada stock’s path to future success
Digital transformation opens up opportunities for product menu expansions in wealth management as the company scales up its offerings. The biggest opportunity lies in the United States for Great-West Life through Empower. The US market should drive growth over the next three to five years. The company already has digital relationships with 18 million Americans and lots of products and services to offer them.
Management is confident in maintaining the strong returns achieved over the past five years, focusing on execution and earnings growth. The company has raised substantial capital in alternative asset management businesses and is actively seeking strategic acquisitions to drive growth.
If inflation has been defeated and interest rates come back down again, individual savings may begin to improve as pressure eases on wallets. This could benefit Power Corporation’s wealth management and insurance businesses, particularly as they address the growing need for longevity risk solutions in the face of declining defined benefit pension plans.
Valuation verdict: Is POW stock a bargain buy?
Power Corporation stock looks cheap with a historical price-to-earnings (P/E) multiple of 10, a forward P/E of 8.8, and a forward price-earnings-to-growth (PEG) ratio of 0.7, which implies shares could be undervalued given the company’s earnings growth potential. According to investing legend Peter Lynch, PEG ratios less than 1.0 indicate potential undervaluation as investors underappreciate the stock’s long-term earnings growth potential.
While the company faces challenges such as ongoing fee pressure in wealth management and rising regulatory costs, management believes they are well-positioned to address these issues through scale, operational efficiency improvements, and potential industry consolidation.
Investor takeaway
POW stock offers an attractive opportunity for dividend-focused investors, with its compelling valuation, strong dividend profile, and multiple growth avenues. Power Corporation of Canada’s diverse portfolio and strategic focus on financial services position it well for future success. That said, your investment’s performance still needs support from stable and growing economies.
