Canadian-based Power Corp: Compelling value and Benefactor of a Weaker Dollar

Power Corporation combines undervalued NAV with benefits of foreign dividends in times of a weakening US Dollar.   

Power Corporation (PWCDF) is a Canadian financial holding company trading at a discount to the sum of its parts.  In addition, if the US Dollar were to weaken against the Canadian Dollar, income investors will be rewarded through a higher yield.  

However, the structure is a bit complicated.  Power Corp major assets include:
-    65.7% interest in Power Financial Corp, 
-    100% ownership of Square Victoria Communications,
-    100% ownership of Power Energy Corp,
-    100% ownership of the Sagard Funds.

Power Financial is a major Canadian financial services firm focused on insurance and investments.  Power Financial owns interests in several well-known life insurance and wealth management firms, these include:

1) 62.7% stake of Great West Lifeco. Great West Lifeco owns the following insurance companies:  The Great West Life Assurance Company, London Life Insurance Company, The Canada Life Assurance Company, Irish Life Group Limited, and wealth advisors Putnam Investments.  Combined, Great West has $1 trillion in assets.  

2) 58.8% stake of IGM Financial.  IGM in turn owns Canadian-based wealth managers Investors Group, Mackenzie Financial Corporation, and Investment Planning Counsel.

3) 27.5% indirect ownership of Brussels-based holding Company Groupe Bruxelles Lambert.

Power Financial’s interest in Great West Lifeco is worth C$21.07 billion (USD$15.05), and IGM C$5.07 billion (USD$3.63 billion).  With Groupe Bruxelles Lambert’s US$12.9 billion market cap, a 27.5% interest would be valued at C$3.5 billion (USD$2.4 billion).  Combined, Power Financial could be worth around C$29.66 billion (USD$21.60 billion).  

Power Corp’s interest in Power Financial could be worth about C$18.53 billion (USD$13.24 billion).  

In addition, Power Corp owns investments in Canadian roof-top solar, manufacturing, a French-Canadian newspaper which is a top Canadian site for news and information, along with online employment and advertising agencies.  Power Corp also owns Sagard Funds, a diversified European private equity fund manager, with investments in the US and China.  

As of June, Power Corp had C$812 million in cash and C$652 million in debt.  In addition, Power Corp other investments in Saga Funds, Power Energy and Square Victoria Communications is on the books as having a value of $2.1 billion (USD$1.6 billion).  In total, Power Corp should have an NAV of $20.7 billion (USD$14.9 billion)

However, PWCDF has a market cap of C$13.27 billion (USD$9.45 billion). Current valuations puts a 35%+ discount to a sum of the parts estimates.  Power Corp pays a quarterly dividend of C$0.31, or C$1.24 a year.  At the current exchange rate, this would be equal to USD$0.96 per share annually.  With PWCDF trading on the OTC markets at $20.60, the dividend would create a 4.6% yield and represents a comfortable 30% payout ratio.

Power Corp traded at a 9.1 PE vs a 5-yr average of 10.8, for a 15% undervaluation from its 5-yr average.   S&P and Dominion Bond Credit Ratings both rate Power Corp as “A” with a stable outlook.

The US share price collapsed with the strength of the US Dollar and represents an almost 30% difference in valuation solely from the foreign exchange exposure.  The Canadian Dollar has historically traded about parity to the US Dollar, but as with all major currencies, has declined to about $0.71 on the $1.

If the USD weaken in 2016, the US share price and dividend income would respond accordingly, increasing the potential gains for investors.  Even without a currency adjustment, Power Corp’s consensus price target is around C$35 for a 25% potential gain.

Investors looking for income and willing to take on a bit of foreign exchange risk should look at Power Financial.  The rewards could be quite pleasant over the next few years as the US Dollar weakens and Power Corp continues to grow, gaining higher investor attention.


This article first appeared in the Jan 2016 issue of Guiding Mast Investments.  
Thank you for reading,  George Fisher