IGM Financial Versus CIX and AGF

As a dividend investor I’m always on the lookout for a higher dividend yield with excellent metrics. Usually that is a hard fit to come by, since the higher the yield the higher the risk. An area that has come across my radar recently, are the Canadian asset management companies, which primarily sell mutual funds and provide wealth management services. I view this sector as an added level of diversification in the financial industry to banks and lifecos (life insurance companies).

The Asset Management Companies

Of the Canadian Asset Management companies, IGM Financial (IGM) is clearly the largest with over 108 billion dollars of assets under management (AUM). Most Canadians will recognize IGM through the Investors Group and Mackenzie group of mutual funds. While I currently do not own IGM, I sure would like to!  This is a well run and well managed company, with solid fundamentals under the Power Financial group.

The Canadian banks also have their mutual fund families, with Royal Bank being the largest, as well as American providers such as Trimark (INVESCO), and Franklin Templeton.  Canadian Asset Management companies also include CI Financial Corp. (CIX), AGF Management (AGF.B), and other smaller companies such as Dundee and Guardian Capital Group, among others. Excluding the banks, the top three Asset Management companies which pay dividends are: IGM Financial, CI Financial, and AGF Management.

Don’t Buy Mutual Funds, Buy the Company!

IGM Financial Inc. (IGM) which trades on the TSX, is one of Canada’s leading personal financial services companies. It is one of the country’s largest managers and distributor of mutual funds and other managed asset products. IGM’s activities are carried out principally through Investors Group, Mackenzie Financial Corporation and Investment Planning Counsel. AGF Management also sells mutual funds under AGF Investments and AGF Trust. CI Financial Corp. is well known under the Cambridge and Harbour group of funds. As a Canadian investor you will likely recognize these mutual fund companies. At some point, you have probably invested in these funds, before you became an astute DIY investor, whether that is a couch potato or dividend diehard.

As I discovered in 2009, it is far more profitable to invest in the mutual fund companies directly instead of their products. Instead of paying high MER’s (management expense ratios), broker’s commissions and trailer fees to own these mutual funds, you can get a hefty 4.7% yield by investing in the parent company IGM directly. Then there is CI Fund Management (CIX) with a 4.0% dividend yield. AGF.B is currently paying a whopping 8.1% dividend yield – although that is a risky yield and likely unsustainable. Both CI and IGM have seen phenomenal growth in their share price as well.

IGM Financial (IGM)

IGM Financial (IGM) is a member of the Power Financial Corporation group, one of Canada’s best run management companies. I wrote about POW and PWF recently, as well as AGF, since they were in my 2012 Canadian Stock Picks. IGM is an 11.8 billion dollar company. It pays a current dividend yield of 4.70%. Its annual dividend is $2.15 per share, with an EPS (earnings per share) of $3.51, which gives a dividend payout ratio of 61.2%. IGM has a current return on equity of 20.96% and a profit margin of 33.28%.  As with other Canadian lifecos and mutual fund companies however, the debt is higher, with a debt to equity ratio of 119.95. This is a much higher debt to equity ratio than its competitors AGF and CI Financial. IGM is currently trading at $45.20 per share.

CI Financial Corp. (CIX)

CI Financial (CIX) is known under the Cambridge and Harbour group of funds, among others. CI is a 6.7 billion dollar company. It pays a current dividend yield of 4.00%. Its annual dividend is $0.96 cents per share, with an EPS (earnings per share) of $1.32, which gives a dividend payout ratio of 72.7%. CI has a current return on equity of 23.66% and a profit margin of 25.19%.  It has a debt to equity ratio of 48.17 which is excellent, and currently trades at $23.87 per share. CI has also had a phenomenal increase in the growth of its share price this year.

AGF Management (AGF.B)

AGF Management (AGF.B) is also one of Canada’s most recognized mutual fund companies, with 1.2 billion dollars in assets, a tenth of IGM’s market cap. It pays a whopping dividend yield of 8.00%. AGF’s annual dividend is $1.08 per share, with an EPS of $1.19, which gives a much higher and dangerously high dividend payout ratio (DPR) of 90.7%. That could be reason enough for a potential dividend cut. AGF has a current return on equity of 8.82% with a profit margin of 14.41%. As mentioned, AGF has a debt to equity ratio of 67.29. Although AGF pays a much higher dividend yield than IGM, its dividend is too high, and its margins and return on equity are much lower. When you compare the chart of AGF to CI and IGM, the declining share price tells the whole story. Although I had initially recommended AGF Management in my 2012 Canadian Stock Picks, I can only recommend this now as a speculative investment – buyer beware.

Which One Comes Out On Top?

So if you were to choose between either AGF, CIX, or IGM, which one would you choose?  All three companies have their strengths and their weakness. Let’s run the basic numbers:

Metric AGF.B CIX IGM Winner
1. Market Cap (billions) 1.27 B 6.7 B 11.8 B IGM
2. Assets Under Management 27.8 B 51.8 B 108.1 B IGM
3. Dividend Yield 8.00% 4.00% 4.70% AGF
4. Dividend Payout Ratio 90.70% 72.70% 61.20% IGM
5. Debt to Equity 67.29 48.17 119.95 CIX
6. Return on Equity 8.90% 23.66% 19.23% CIX
7. Profit Margin 14.41% 25.19% 33.28% IGM
8. Quarterly Earnings Growth -10.60% 0.50% 21.20% IGM
9. Price to Book , Price to Sales 1.09 , 1.70 4.19 , 4.61 2.70 , 4.30 AGF
10. Stock beta (volatility) 1.445 0.669 0.639 IGM
Totals: AGF=2 CIX=2 IGM=6

In this case IGM is the clear winner, especially in important areas such as profit margin, growth and earnings. Sometimes it’s best to invest in the largest companies. IGM is also a more stable dividend payer than its competitor AGF. CIX was not a bad runner up either, in fact it has the lowest debt levels of the three, with a good dividend yield as well. CIX and IGM are both good companies to invest in. However you get a higher yield, better earnings growth, and more stability with IGM.

AGF on the other hand has a dividend payout ratio over 90% with a whopping dividend yield of 8.00%. The high yield and lower profit margin and lower earnings, should be a red flag there is a problem with AGF – investors should proceed with caution. Having looked at the numbers for IGM, I feel IGM is a company I would like to add to my portfolio in the future.

Readers, what’s your take? Do you own AGF, CIX, or IGM? Would you consider adding either company (or all three) to your dividend portfolio?

Disclaimer: I currently do not own AGF, CIX, or IGM. I have owned AGF in the past.

15 Responses to “IGM Financial Versus CIX and AGF”

  1. PC

    May 05. 2012

    Great article Ninja!

    I personally hold a big chunk of my net worth in IGM (a company in an industry I know very well). Addressing IGM debt, it does look high, but its mostly unsecured debentures spread out over many years. The ratings agencies rate it very high and stable (i.e. S&P: A+).

    The company is using that debt to buy back shares. I think that’s a great strategy (debt is still relatively cheap, and the stock is relatively cheap, too).

    Me likes IGM a lot!

    -PC

    Reply to this comment
    • The Dividend Ninja

      May 05. 2012

      PC thanks for posting! I’m looking to buy IGM for my TFSA, it’s at the top of my list right now. :) What’s your view on CI Financial?

      Cheers!

      Reply to this comment
      • PC

        May 05. 2012

        I think the stock price premium of CIX relative to IGM is not warranted. CIX is still very good at creating products and bringing them to market fast (i.e. their guaranteed-minimum-withdrawal funds), but I think their growth will start to slow. Of course a takeover is still a possibility (Scotia fell through. CIBC?)

        I still prefer IGM: rock solid dividend, super profitable business.

        Reply to this comment
  2. Don

    May 05. 2012

    Ninja,

    Interesting article. For a further discussion of the interplay of certain of the financial ratios you highlight, you might want to look at Damodaran’s “Investment Valuation” text.

    For financial companies, I give less weight to “profit margin”; it’s just not as comparable a measure as when analyzing a non-financial. Also, when one does look at profit margin, the valuation math (discounted cash flow equations) links that metric with the price to sales ratio. A higher profit margin supports a higher price to sales ratio before one can say the thing is over-valued. In this case, IGM has a better profit margin but lower PS ratio than CIX, suggesting IGM might be the better relative value.

    For return on equity, the linked ratio is price to book. Again, a better ROE supports a relatively higher PB ratio, all else equal. Financial companies in particular are often well-analyzed simply by looking at ROE and PB, as well as ROA. With these companies, again, just eye-balling it, IGM is probably a better relative value than CIX (the IGM ROE is lower than CIX’s, but the PB for IGM is much lower than CIX’s). One can divide ROE/PB to see which of the three shows best.

    But before you finish that thought, one has to back out the extra boost to IGM’s ROE that the extra debt (leverage) provides. In this case, IGM’s debt is a lot higher than CIX, but the ROE is noticeably lower. So maybe IGM’s performance isn’t quite as good as what CIX is doing. (Though I’d want to check IGM’s equity; if they’ve bought back a lot of stock, that can distort the relevant metrics.)

    Cheers.

    It wll be interesting to see what happens to AGF.

    Reply to this comment
    • The Dividend Ninja

      May 05. 2012

      Don, thank your for taking the time and for such a detailed comment. ;) From a basic view IGM looks to be better valued than CIX. Either of these companies would still be a good investment. Would be interesting to see if the same metrics follow in the next few quarters.

      Cheers

      Reply to this comment
  3. Norm

    May 06. 2012

    DN,

    You have done a detailed analysis based on dividend yield, but you are missing a key piece of information: mutual fund sales. Would you buy into a mutual fund company that has consistent net redemptions?

    For your information, both IGM and AGF have a net redemption problem. They offer no explaination, but you would think the rise of low cost ETFs is eating into their sales – hard to justify 3% MERs when many excellent products are available at less 1/6th of that price.

    It’s one thing to enjoy owning a “piece of the enemy” of DIY investors, but it’s another to buy into a company with decreasing sales which will eventually hurt their revenue and earnings growth if the market returns do not exceed not only the MER but the net redemptions. This may have worked in the past, but thanks to an onslaught across the media world including sites like yours, these companies must adapt to survive and so far they seem to have no inclination to do so. Past results are not an indication of future returns.

    I have not done the analysis on CIX but I have heard they are doing reasonably well all things considered. Further research is required.

    The second question you should ask yourself is do you see any of these companies, 10 years from now, with higher revenues in the market for 2-3% MER mutual funds?

    I believe AGF’s stock has come to reflect the reality of this situation, plus they are issuing new stock at a rapid rate and will be cutting their dividend in the near future. IGM is keeping afloat only because of their stock buybacks, which are currently exceeding their net redemption rate, but that is in danger of accelerating.

    I do not have any positions in any of these companies.

    Reply to this comment
    • The Dividend Ninja

      May 07. 2012

      Norm, you do bring up a very interesting point. ;) I would like to think and hope that all these actively managed mutual fund companies wouldn’t exist or have MER’s of 0.4% or less, instead of the current 2.4%, so investing in them wasn’t even a consideration. I agree with you that is unlikely to change any time soon, and the industry doesn’t seem inclined to do so.

      Also unlikely to change is people continuing to buy actively managed mutual funds. I think very few of the people I work with even know what an ETF is, what an e-series fund is, or even know they can buy the top 10 holdings in their mutual fund easily enough themselves. The mutual fund marketing machine is enourmous, and most unfortunately alive and well. People are more likley to deal with a salesperson than worry about an MER issue I am afraid. ;)

      I’d be very interested to research the net redemptions vs sales of these companies over the last few years or so. If you have any ideas send me an email.

      Cheers!

      Reply to this comment
      • Norm

        May 07. 2012

        DN,

        I like to consider myself a source researcher, in that the best information is at the source, and not on the stock screeners. IGM themselves report their sales and redemptions quarterly in their reports.

        http://www.igmfinancial.com/english/media/2012/files/0504-firstQuartResults-e.pdf

        They are a little sneaky, in that they break apart the Mackenzie and Investors mutual sales. They clearly do this because the Mackenzie funds are hemmoraging at a great rate.

        In the first quarter of 2012, Investors funds had net sales of $175 million, compared to $500 million in Q1 2011. Mackenzie funds had net redemptions of $931 million, compared to net sales of $121M in Q1 2011. In total, net redemptions for both funds, which together comprise IGM Financial Inc, were $731 million, in the first quarter alone. This is a continuation of a trend that has been in place for the last three or four quarters.

        All of this has contributed in a drop of earnings in Q1 2012 from Q1 2011 from 81 cents a share to 78 cents a share, on less shares outstanding due to buybacks, which is even worse.

        IGM can likely sustain its dividend for a while, and maybe can turn things around, but their status as a dividend achiever over the long term is not at all certain. In the last quarter, they also reported, for the first time in probably over ten years, a decrease in the number of Investors Group sales representatives from 4602 to 4522. That means 2% of their sales representatives left.

        I point out this information for two reasons. One, you have to read at least the quarterly summaries of any company that you buy stock into – screeners can only tell you so much, and just because a stock is a dividend achiever does not make it a good company in the future, it only means it has performed well in the past. Second, I have no stake in this company, but would hate to see anyone invest in what a very basic analysis will tell you is going to become a turnaround company that is not priced for revenue and earnings shrinkage.

        AGF is even in worse shape, and they are issuing a lot of shares to pay for the dividend. It is not sustainable, their payout ratio is nearly 100% and they will have to cut it within a year or two. It would be highly irresponsible of them to raise their dividend and I am certain they will be off the achievers list in no time.

        Good luck.

        Reply to this comment
  4. My Own Advisor

    May 09. 2012

    Nice, detailed post, as usual.

    I hold IGM indirectly via POW. I plan on holding it, POW, for a very long time.

    AGF, they are in trouble I think.

    CIX, I have to be honest, I haven’t thought about it too much.

    BTW – congrats on the growing readership, almost at 900!

    Mark

    Reply to this comment
  5. DylanTheBlogger

    May 17. 2012

    I own shares of AGF.B which I bought at a higher price than where they are now. I will mention a couple of things about this stock. First AUM are actually much higher than you reported, they are closer to 45 billion. Secondly AGF’s subsidiary AGF Trust which issues GIC’s and originates loans and mortgages is currently overcapitalized and therefore AGF.B has been repatriating funds from it and may be able to continue to do so.

    That being said AGF has three major problems currently as I see it. 1. Their mutual fund mix appears to be stacked heavily toward equities and the best performing of those just lost the star manager. 2. Net redeptions have been high for the last couple of years and unless stocks start outperforming soon this may not change in the near term. 3. The one bright spot is that thy have been growing their institutional managed asset base but the margins on these assets are much lower than on retail mutual funds.

    All in all not great prospects. To complicate matters the company is controlled by management and at present doesn’t look like it is up for sale so there is no takeover premium associated with it. The dividend yield appears to be signalling risk of a dividend cut. I would love to see this one turn around but certainly there are large risks

    -Dtb

    Reply to this comment

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