Power Financial Review

Power Financial is a holding company that is controlled by Power Corporation of Canada, which is in turn controlled by the French Canadian Desmarais family. The company was built by Paul Desmarais, who was a wealthy Canadian financier that used a type of cascading share ownership to control a number of Canadian public companies. Paul Desmarais has passed away and his companies are now controlled by his sons. Today, Power Financial has a market cap of $21 billion and a controlling ownership of IGM Financial (Investors Group & Mackenzie Financial), and Great-West Life. Power Financial also owns a stake in Pargesa, which is a holding company based in Europe that holds shares in a number of European public companies.  Pargesa is controlled by Power Corp & Albert Frère’s CNP. The relationship with Albert Frere is based on an historical alliance between him and Paul Desmarais who used the same cascading share ownership techniques and financial arrangements. In Canada, Power Financial most closely resembles E-L Financial, which is the holding company controlled by the Jackman family. Both Power Financial and E-L Financial are highly liquid and have investments in financial services.

The share price of Power Financial has gone nowhere in a decade, but it continues to pay a healthy dividend. The performance of Power Financial shares are closely related to the liquid nature of its holdings (Power Financial’s main assets are publicly traded) and the types of businesses that it owns. Low interest rates are causing life insurance margins to be compressed. Higher interest rates will help Great-West Life offer higher returns to policy holders and annuitants. But compared to its peers such as Manulife & Sunlife, Great-West has performed ok.  Great-West Life sports a dividend yield of 4.06%, compared to Manulife at 4.25%, and Sunlife 3.84%. These companies are competing in a defensive industry, and so shareholders should expect high dividend yields.

IGM Financial (which owns Investors Group & Mackenzie Financial) has a huge dividend yield right now (6.37%), but its facing systemic headwinds as the financial advisory and fund management businesses go through long-term transformations. IGM faces challenges because of fee compression, which is partly caused by new technology, index funds, and competition. One aspect of IGM that I don’t think enough investors are talking about right now is their balance sheet. IGM has a market cap of $8.5 billion, but it also has long term debt of $8.5 billion. IGM’s balance sheet is pretty leveraged and the share price could become more volatile if interest rates go higher (which doesn’t look likely right now, but times change).

Overall, I think long term investors should keep an eye on Power Financial.  It is a suitable investment for a conservative equity portfolio as part of a financial sector allocation. The high dividend and liquidity of the underlying assets provide some nice cushion for someone holding these shares in a taxable account.  But Power Financial investors should be cautious because interest rates may remain low (thereby putting added pressure on the life insurance business) and the fund management business will continue fighting against the tide of fee compression.

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