Last week I covered the first half of my 2012 Canadian Stock Picks . I covered three of my favourite companies I’ve had on my watch list for quite awhile, Husky Energy (HSE-T), Telus Communications (T-T and TU-N), and Corby Distilleries (CDL.A-T). This week I continue with my other picks, all in the financial sector.
Unless noted, the following companies trade on the TSX (Toronto Stock Exchange).
AGF Management (AGF.B)
If you invest in Canadian mutual funds, then you will be quite familiar with AGF – as you likely own some of their products. Instead of paying trailer fees, commissions, and management expense ratios to hold mediocre mutual funds, you can do much better owning the stock directly. AGF is a $1.6 billion dollar company, which pays a very generous dividend yield of 6.5%. However it does have a high dividend payout ratio of 82%. AGF also has a presence in the Asian and European markets.
Compared to other financials such as the Life Insurance Companies, AGF has much less debt, with a debt to equity ratio f only 24.30. Although a much smaller capitalization company, AGF is trading at a much better price point than the Canadian banks. With RRSP season approaching, AGF may be a good investment as investors will start purchasing mutual funds, and increasing equity into the company’s cash flow and bottom line. AGF.B currently trades at $16.69 per share – not at the bottom, but not at the top either.
AGF is a stock I like to play on the swings, though it will also make a great long-term holding with its generous dividend yield. I may even consider that looking forward in 2012. I had purchased shares of AGF.B back in August 2010 when they were trading around $14.60 per share, then sold in the spring of 2011 for around $17.50 (thought it climbed over $19). It was also a great way to get back at an actively managed mutual fund company that hosed me for years!
Update, May 4th, 2012: AGF Management currently has an increasing dividend yield to 8.00%, a high dividend payout ratio of 90.7%, and a declining share price. Caution is advised on purchasing this stock. Also see my recent post:
IGM Financial Versus CIX and AGF.
Power Corp. of Canada (POW)
Power Financial Corp. (PWF)
Power Corp. of Canada (POW) is essentially the holding company for Power Financial (PWF), and as a rough estimate owns about 65% of Power Financial Corp. (PWF). These are no financial lightweights, with PWF at $18.2 billion dollars market capitalization, and POW the holding company at $9.2 billion. Both companies pretty well own the same assets, so it really depends on yield, share price, and whether you would prefer to hold the parent company. Although I just happen to like the sound of “POW”, I would be more inclined to invest in PWF with its slightly higher yield and much higher market capitalization.
Both POW and PWF are indeed financial powerhouses. Because of the financial and geographic diversification of their holdings, I believe POW and PWF are better investments than holding the Canadian life insurance companies directly (even though they collectively own GWO and IGM). POW would indirectly hold the same assets through its ownership of PWF.
Unlike the other Canadian lifecos (life insurance companies), which are struggling with high debt and low profit margins, Power Financial (PWF) is a profitable powerhouse. It is diversified across the financial landscape and internationally as well. Its financial subsidiaries include well known insurance giants Great West Life (GWO), London Life, IGM Financial etc. Power Financial (PWF) also owns big brand name Canadian mutual fund companies, such as Investors Group and Mackenzie Financial. Just like AGF Management, it is much more profitable to hold the mutual fund company instead of mutual funds it owns!
PWF however does have a significant presence in Europe and the U.S. through its subsidiaries like Pargesa Holding SA of Switzerland. While investors are running for cover whenever they hear the word “Europe” or the “U.S.”, I believe this international exposure may give PWF its strength. Different areas of the world will have different economic conditions, rates of recovery and growth, and a company like PWF can take advantage of that geographic diversification.
PWF is currently trading at $26.14 per share, with a debt to equity ratio of 42.77, a dividend payout ratio of 61.6%. The dividend yield is currently 5.4%.
POW is currently trading at $24.70 per share, with a debt to equity ratio of 28.59, a dividend payout ratio of 53.4%. The dividend yield is currently 4.8%.
The fundamentals for POW are better than PWF, but you get the higher dividend yield and higher market cap with PWF. While both PWF and POW are not trading at the bottom, I think these companies represent good value for investors at these price levels. Both these companies have done well in the recovery that followed the Financial Crisis in 2009. For more information, check out the in depth analysis of these companies by the Dividend Guy, on his Canadian Dividend Stock website: PWF and POW.
Laurentian Bank of Canada (LB)
When people talk about the Canadian Banks, they usually refer to the big 5 such as RY, BMO, CM, TD, and NA. Laurentian Bank of Canada is the smaller player on the scene, with only $1.1 billion dollars in assets, but it has also been a top performer over the last 6 months in capital appreciation.
Last June, Laurentian Bank was hit hard with a less than stellar earnings report and thin margins. LB was left as the underdog, and investors make it quite clear they were more inclined to invest in the other smaller player, Canadian Western Bank. Then at the beginning of August the big Euro fear spread through the markets, and investors again pulled their money out of the Canadian banks. In reality the debt concerns in Europe had little to do with the day to day operations of Laurentian Bank, but the share price for LB again lost value.
To make a long story short, you could have picked up shares in Laurentian Bank (LB) for $39 per share on August 7th, 2011. Since then LB has currently climbed to over $47 per share, and it looks like it will continue to climb further. Back in August I was seriously considering investing in Laurentian, but really didn’t have the funds available without using the line of credit – so I decided not to buy at the time. LB is currently priced at $47.30 per share, has a dividend payout ratio of 37.5%, and a dividend yield of 3.8%.
To be continued…
Yes there is a Part-3 rumoured to be in the works
Readers: What’s your take? Do you like AGF.B, POW, PWF or LB? What Canadian financials do you like for 2012?
I currently do not own the securities mentioned, but have owned AGF.B in the recent past. The Dividend Ninja is not a professional financial advisor or an investment dealer. This website does not offer professional or financial advice, is not a buy recommendation, and is intended to provide general information only. The Dividend Ninja is not responsible for the investment decisions you make. You should consult with a professional financial advisor before making any investment decisions. Be prudent and cautious. Do your own research, and only invest in what you understand!
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