Power Corp. , the Canadian-based financial services conglomerate, has a little-known distinction: It's managed to beat the world's best investor at long-term value creation.
In fact, Power Corp. has trounced Berkshire Hathaway Inc. and its celebrity boss, Warren Buffett, in creating wealth for shareholders since the mid-1990s.
Over the past 10 years, an investment in the Canadian company has yielded a compounded annual return of 7.71 per cent, compared with Berkshire's 6.25 per cent, according to Bloomberg. Those figures include capital appreciation plus dividends. The latter are a rich source of income at Power Corp., but don't exist at Berkshire, where Mr. Buffett believes in plowing all earnings back into the enterprise.
Over the past 15 years, Power Corp.'s record looks even better. It has piled up gains of 15.08 per cent compounded annually, compared with only 9.16 per cent for Mr. Buffet.
To be fair, Berkshire is well in the lead for the past five years, at 6.98 per cent against Power Corp.'s 1.34 per cent, but therein may lie an investment opportunity.
Despite its exceptional track record, Power Corp. has been thrown off its stride since the U.S. financial panic. Its shares have languished, and may represent an opportunity to pick up a good company at reasonable price, as the crisis recedes.
As an added kicker, there is the yield. Power Corp. pays a 4.1-per cent-dividend, so investors are being paid while waiting for the company to recover its winning ways.
So what are the possible pitfalls? Power Corp.'s fortunes will ebb and flow with the life insurance and money-management businesses. Through its subsidiary Power Financial, it has controlling stakes in insurer Great-West Lifeco Inc. and money-managing giant IGM Financial Inc., which together account for the bulk of earnings.
A rare misstep for Power Corp. was the timing of its acquisition of U.S. money manager Putnam Investments, just before the 2008 market crash. Putnam has been a laggard, but has recently shown signs of a turnaround.
Power Corp. is controlled by the financier Paul Desmarais, through multiple voting stock. It's now run by his two sons, André and Paul Jr., whom Craig Fehr, a Canadian financial institutions analyst at Edward Jones in St. Louis, Mo., believes are up to the task of filling their father's shoes.
The analyst community has a so-so attitude towards the company, another plus, because it suggests investors aren't being urged by their brokers to pile into the stock. Three analysts rate it a "buy" and three have a "hold," according to Bloomberg's tabulations.
One of the bulls is Mr. Fehr. He says that if you like the long-term prospects for the money management industry and the Canadian life insurance business - which he does - then Power Corp. is a great stock to own.
He believes that demographics favour the accumulation of wealth and savings and therefore the need for money management services. He also thinks that consumers are less likely to cut life insurance payments than other discretionary expenditures, and that over the longer term, interest rates are likely to rise, which helps insurers by increasing the yield on their investment portfolios.
"Our 'buy' rating is reflective of the fact that we think that the intrinsic value of Power Group is worth more than what the market price is today," Mr. Fehr says.
Margin of Safety
Investors have a margin of safety because Power Corp. is trading at a discount of around 20 per cent to its break-up value, or the money that would be returned to shareholders if it liquidated all its holdings, such as Great-West Lifeco. According to an estimate by RBC Dominion Securities Inc., the discount has averaged 16 per cent since 1990, suggesting that the company is moderately undervalued.
By some other measures, Power Corp. is also relatively inexpensive. Tom Connolly, publisher of the Connolly Report newsletter, tracks a portfolio of 23 high quality dividend-paying stocks on the Canadian market, including Power Corp. He says the company is trading at about 13.5 times its average annual earnings over the last decade, which is less expensive than the average 18 times of the other stocks he follows. Its 4.1-per-cent dividend yield is also above the company's own average of 2.6 per cent over the past 10 years.
However, Mr. Connolly says any dips in the price may offer even better entry points for those who want to acquire the stock dirt cheap.