Power Corporation of Canada (TSX: POW) is one of Canada’s oldest non-bank financial services companies. Founded in 1925, the company is best known for its insurance operations: it is the part-owner of Great West Lifeco, IGM Financial and GBL. It also has a wealth management business and several investments in financial technology, including WealthSimple, a trading app that it owns 55% of.
Power Corporation started off as a utilities holding company, which is the reason it has the word power in its name. Over the course of a century, the company’s operations slowly evolved more toward insurance and wealth management. This was partially because various utilities the company owned were nationalized by provincial governments. Due to these expropriations, Power Corporation had to look to other sectors for opportunities. After some research, its managers decided to focus on the insurance sector.
When you look at Power Corporation’s sprawling operations and historical evolution, it’s hard not to be reminded of Berkshire Hathaway, the U.S. holding company controlled by Warren Buffett. Like Berkshire, Power Corporation started off with operations completely different from its current ones. Also, like Berkshire, Power Corporation is mainly involved in insurance. These similarities to the world’s most respected holding company certainly make Power Corporation look tempting. In this article, I will explore Power Corporation’s business so you can decide whether it is a fit for your portfolio.
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Insurance operations
Power Corp has three main insurance operations:
- Great West Lifeco
- IGM Financial (which is also involved in wealth management)
- GBL
Great West Lifeco and IGM are mainly life insurers, while GBL is a health insurer. Life and health insurance are among the more stable and predictable parts of the insurance business, with predictable claims that leave insurers free to make long-term investments with policyholder money. Great West Lifeco has an 84% combined ratio. Less than 100% is considered ideal (lower is better) so that the insurer appears to be well-run. The ratios are similarly good for IGM and GBL.
Wealth management operations
After insurance, wealth management is the second biggest part of Power Corp’s business. The company’s best-known wealth management business is IG Financial, which manages money for Canadians from coast to coast. It offers diversified index fund portfolios through several partners, including US asset management giants like iShares. It also has alternative asset management businesses that cater to high-net-worth individuals.
Growth
Power Corporation grew considerably in the trailing 12-month period, with revenue and earnings up about 15%. Over the last five years, the company’s revenue declined due to divestitures, while earnings compounded and grew by 5.5% annualized. Overall, the growth situation with Power Corporation is OK.
Profitability
Power Corporation was reasonably profitable in the trailing 12-month period, with a 6.5% net margin and a 10.5% return on equity. The free cash flow (FCF) margin was negative, although FCF is not usually considered all that relevant for financial services companies.
Valuation
Last but not least, POW stock is fairly inexpensive, trading at 11 times earnings, 0.83 times sales and 1.3 times book value. This is a fairly cheap valuation by the standards of Canadian financials today; the Big Six banks trade at about 13 times earnings on average. When contrasting POW’s multiples with its profitability and growth metrics, the stock appears to be an intriguing investment opportunity.
