Power Financial (PWF.TO) and Power Corporation (POW.TO) are powerhouse Canadian financial companies connected at the hip. Founded by the Demarais family, these two companies are usually overlooked by US investors. However, they offer stable exposure to Canadian financial consumers and to European equity markets. Investors seeking greater exposure to Canadian financial markets should review both companies.

Power companies reach 12 million Canadians and serve about 1 in every 3 Canadian citizens. The Power companies proved their investment value during the financial crisis of 2007 to 2009 by actually earning their dividends. However, like much of the rest of the financial sector, Power company stocks slid by about 50% before rebounding in 2010.

Power Corp is a holding company whose largest investment is a 68% ownership of Power Financial. As the organizational chart describes, POW also owns a communications and media firm along with various investments. The investments include private equity positions in companies in Europe, the US, China and the Pacific Rim.

Power Financial Corp is a financial services company involved in insurance, money wealth management, and European equity investments. PWF offers some well-known financial services brands, such as Canada Life, Great-West Life and Putnam Investments. ICM Financial offers wealth management services along with commercial employee benefit packages. PWF, through its interest in Pargessa (PRGAF), owns about 13.9% of Groupe Bruxelles Lambert (GBLBF), itself a holding company with concentrated equity investments in major European companies. For example, GBL owns a 3.6% interest in the French oil-giant Total (TOT) and represents about 20% of GBL’s book value.

I strongly suggest reviewing the Organizational Chart on their website here: https://www.powercorporation.com/en/about/organization-chart/

Both pay a dividend which was pretty stable during the recent financial crisis. However, both POW and PWF have not raised their dividend since 2009. POW pays a dividend of CAD$1.16 while PWF pays CAD$1.40 per share. At a current price of $31 for POW and $35 for PWF, the current yield would be 3.8% and 4.0%, respectively.

Comparing the value fundamentals, both POW and PWF are about equal with PE’s of 14.7 and 13.5, and both carry the same consensus buy recommendations at a lukewarm 2.4.

The biggest fundamental difference is price to book value valuation where POW is trading at 1.2x book value while PWF is trading at a premium of 1.8x book value. One reason for this discrepancy is the better 10-yr average return on invested capital ROIC of PWF at 8.7% vs a 10-yr average ROIC for POW at 5.9%.

If consensus price targets of $35 for POW and $39 for PWF are reached over the next two years, POW would generate a 13.2% total annual return while PWF would generate a 9.7% total annual return.

Power Corp has a higher Navigator Rating by virtue of its lower current valuation and is in a buy range while Power Financial is a neutral Rating, mainly due to its premium to book value.

POW’s other assets above its ownership of PWF provide some interesting diversification. However, the bulk of POW’s cash earnings, and hence dividends, comes from PWF. For the year 2013, total-operating earnings for POW was $1.035 billion, with PWF accounting for $1.124 billion and the balance generating a loss of $89 million.

Power Corp owns the controlling interest in PWF. In addition, POW’s exposure to the other assets offering a potential turnaround makes POW the preference between the two. With the dividend payout ratio fluctuating between 52% and 64%, earnings growth from here should create the opportunity for increasing the dividend to match earnings growth.

We are adding Power Corp POW.TO to our list of followed companies.

More information on POW can be found on its website: https://www.powercorporation.com/en/

We have a long positions in POW.TO. It is followed by Guiding Mast Investments monthly newsletter.

I appreciate your time and interest in Guiding Mast Investments, George Fisher