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:
|Totals:||AGF=2 CIX=2 IGM=6|
|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|
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.