Power Corporation of Canada (OTCPK:PWCDF) is a relatively unknown large-cap financial services company. The stock is down about 30% on the year so far and is slowly recovering from a 50%+ drop that happened in March. Amidst market turmoil, selecting solid dividend stocks is increasingly important in order to mitigate the effects of wild stock swings. We believe that the downside with Power Corporation is limited given the company’s position with multiple revenue streams in various regions of the world. As such, PWCDF proves as a worthwhile investment barring the great dividends that it offers.
Power Corporation of Canada has been a reliable dividend stock for decades.
The company has seen great returns over the last decade and was able to pay close to $6 billion alone. PWCDF has seen a 40% growth in dividends per share in the last 10 years. The risk for a dividend cut is quite low, given that even during the COVID-19 crisis, the company has maintained its record-high dividend payout.
Power Corporation’s quarterly report shows that both revenues and expenses were relatively flat compared to previous quarters. Given the nature of its service offerings, the effects of COVID-19 will have minimal impact on the company’s financial performance relative to other industries, such as retail and food services.
We believe that the company will continue to experience relatively flat revenues, expenses, and net earnings figures. Any drop in revenue due to lost business, such as the movement of investment funds of customers, could potentially be offset by those looking to purchase insurance policies, as well as those looking for professionals to manage their money during a pending economic crisis. Thus, the company is in a good position to be able to continually pay its dividend through its consistent net earnings figures. Historically, the company has proven to be resilient during economic downturns, as witnessed through the 2008 financial crisis. During this time, Power Corporation did not miss any dividend payments and maintained its quarterly dividend amount for over 5 years before experiencing an upwards trend in the last few years.
Many of Power Corporation’s subsidiaries are well-established investment management companies with proven track records.
Power Corporation’s strong financial performance is reflected through the entirety of its organizational structure, which includes a total of 18 subsidiaries through its full ownership of Power Financial Corporation, as well as 3 major investment platforms through its controlling interests in Sagard Investment Funds. Power Financial’s historic and ongoing objective is to create superior long-term shareholder value through its increasing participation in the emerging fintech industry through its primary holdings of Great-West LifeCo Inc. (an insurance centered financial holding company), IGM Financial (Canada’s largest nonbank asset manager) and Pargesa (a holding company with interests in Europe).
LifeCo’s 5 subsidiaries and $22.6 billion market cap span across its international financial services with interests in life and health insurance, retirement and investment services, asset management, and reinsurance. LifeCo has seen unwavering financial tenacity with a 7.6% increase reported in Q1 adjusted net earnings (Power Corporation 10-Q, 2020). Meanwhile, Pargesa holds a 50% interest in GBL (one of the largest listed holding companies in Europe) suffered a decrease in Q1 net earnings due to a decrease in the contribution from private equity activities but focuses on long-term value creation.
IGM’s two core segments, IG Wealth Management and Mackenzie Investments, saw an increase in net earnings of $10 million and remained stable at $36 million, respectively, in the three-month period ended March 31, 2020 compared with corresponding quarter in 2019. An increase in management and advisory fees offset the companies’ decrease in distribution fee income as well as net investment income to arrive at overall growth this quarter.
We believe that Power Corporation’s overall subsidiary performance is a testament to the company’s unwavering dedication to maintaining financial tenacity even through turbulent times. Though amidst uncertainty in a global pandemic and a pursuing economic slowdown, Power Corporation’s relevance remains relatively untinged by the impacts of changing consumer behaviours. With a large population of the baby boomer generation remaining reliant on traditional investment tools to manage their money, Power Corporation’s portfolio of subsidiaries remain relevant despite uncertain times and prove to be performing at an impressive level in comparison to other consumer industries.
Power Corporation is heavily engaged in diversifying its portfolio and holds significant equity interests in various growth companies in the financial and sustainability space.
We believe that one of the biggest reasons why Power Corporation has failed to see significant revenue growth in the past decade is because big Canadian banks have been adding to their list of service offerings, many of which happen to be similar to the main offerings of Power Corporation’s subsidiaries. One of the biggest advantages of offering investment products as a bank is that since a customer’s money is already stored with the bank itself, it is much easier to sell additional finance-related products on top of simple chequing and savings accounts; banks took advantage of their already established relationship with customers.
However, Power Corporation has slowly started expanding its corporate investments, and we believe that there is significant room for disruption and growth with the financial services space despite the prominent presence of the big banks. Through the corporation itself and its subsidiaries, Power Corporation holds a significant equity interest in 2 promising start-ups: Wealthsimple (83.9% undiluted equity interest) and Koho (54.4% equity interest) (Power Corporation 10-Q, 2020).
Wealthsimple is an online investment management company that offers a variety of financial products such as robo-advising services, savings accounts, and most notably a commission-free mobile-friendly stock trading platform. We believe that Wealthsimple has been able to grow extremely fast given that it was one of the first Canadian companies to offer commission-free trading. This caters particularly well to millennials and young adults, as we believe they tend to be much more conscious about trading fees than other age groups.
Wealthsimple’s easy-to-use mobile platforms have already started capturing the younger age groups, and we believe they will continue to grow their service offerings in the near future. Wealthsimple recently announced the plan to offer cryptocurrency trading, which is a fantastic addition to their addition of services given that the cryptocurrency community comprises of a lot of young adults and millennials. Wealthsimple can grow their revenue significantly by not only attracting new customers but advertise new products to current customers. A centralized platform and brand that provides multiple financial services is what financial services companies other than banks have been going for, and we believe Wealthsimple is already on the right track to that notion. As of March 31, 2020, Wealthsimple already has 350,000 clients across the world (Power Corporation 10-Q, 2020).
Koho is also a fintech company that is growing rapidly and offers a variety of cool features and products. They are most known for their ‘RoundUp’ feature, which rounds up everyday purchases and contributes those amounts to savings and investment accounts. Koho also offers interactive budgets and tracking, and metal cards.
We believe that Koho also caters well to the new generation as their prominent products have no fees and they offer a friendly mobile interface. Koho has also created exclusive cash-back incentives at specific merchants such as Sunwing and JJBean at up to 5%. This particular feature is promising because banks cannot replicate this as easily in comparison to offering generic savings accounts. If Koho can grow their list of exclusive cash-back merchants, this could become a long-term competitive advantage. The result is a portion of the big banks’ consumer base switching to Koho because of unique features.
The financial services sector is rapidly changing and growth companies are vulnerable to increased competition.
The big banks’ resources are unmatched. Therefore, in the long run, it could be tough for companies such as Wealthsimple And Koho to create sustainable competitive advantages. The big banks can easily replicate some of the currently unique services that these growth companies offer. Consumer interests could change in the long run, and features such as zero-fee trading and savings accounts could become less attractive. Moreover, these growth companies could run into regulatory issues as they continue to expand in countries such as the U.S., which has strict investment laws.
In conclusion, Power Corporation has seen impressive financial ratios and consistent financial performance across its many subsidiaries of well-established industry leaders. The ever-evolving financial services sector creates uncertainty for the future of some of Power Corporation’s investments in companies that are susceptible to technological obsolescence. However, with Power Corporation’s engagement in significant portfolio diversification and a keen interest in fintech and sustainability expansion, the company is equipped to tackle changes and challenges, as proven by its performance in past and present economic discord.
We believe that current economic hardship and future industry changes will pose challenges to Power Corporation, however, its greatest asset is its strength in portfolio diversification in industry leaders focused on long-term growth, as well as its keen interest to keep up with emerging industries.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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