3 Reasons to Load Up on Power Financial Corp. (and 1 Reason to Be Cautious)

Power Financial Corp. (TSX:PWF) has a great dividend, trades at a cheap valuation, and is temporarily on sale. It might be the perfect buy, except for one thing.

For the most part, Canadian stocks have shrugged off the latest market turmoil caused by Britain’s potential exit from the European Union.

Before votes were officially tallied, the TSX Composite Index traded at a little over 14,100 points. After two down days in the aftermath of the surprise “Leave” vote, markets rallied on Tuesday and again on Wednesday morning, ending up less than 1% below pre-Brexit levels. In other words, this whole thing has been pretty much a non-event.

A few select Canadian stocks really took this news on the chin because of significant European exposure–a move that has created some buying opportunities. This is very good news for investors looking at Power Financial Corporation (TSX:PWF), a stock I believe offers potential for attractive long-term returns.

Here’s why.

Sum of the parts

Power Financial is a holding company with three main parts. It has a 67.4% stake in Great-West Lifeco, one of Canada’s largest life insurers. It also owns a 61.2% stake in IGM Financial, the parent company of wealth management companies Investors Group and Mackenzie Financial. Finally, the company holds approximately 28% of a European holding company called Pargesa, which in turn has big positions in a handful of other European stocks.

It also holds a 59.8% stake in Wealthsimple, an online-only roboadvisor which uses software to create ETF portfolios for common investors. This position isn’t material compared to the others.

What makes Power Financial interesting is that the company trades at a pretty steep discount to the sum of its parts. It currently has a market cap of $20.72 billion. Yet the value of its underlying assets is approximately $27 billion after taking away the value of its preferred shares.

In short, Power Financial investors are getting $1 in assets for approximately 77 cents.

Valuation

Most of Power Financial’s earnings come from this side of the ocean, meaning the current European issues won’t really affect the company’s bottom line. Thus, we can assume 2016 earnings estimates are relatively safe.

On a forward earnings basis, Power Financial is one of the cheapest stocks on the market. Analysts estimate the company will earn $3.07 per share in 2016, putting shares at just 9.5 times earnings expectations. That’s incredibly cheap.

If we look at 2017 analyst estimates, the stock gets even cheaper. Collective earnings expectations for next year come in at $3.34 per share, putting Power Financial at just 8.76 times earnings.

A great dividend

After years of paying a steady dividend of $0.35 per share each quarter, it appears as though Power Financial has finally gotten serious about increasing its dividend.

It has rewarded investors with dividend raises in both 2015 and 2016, hiking the payout to $0.3725 per share quarterly, and then $0.3925 per share quarterly. Today that’s good enough for a 5.4% yield.

With a payout ratio of just 51% of projected 2016 earnings, Power Financial’s dividend is pretty secure. In fact, investors can likely expect annual dividend raises going forward.

One reason to be cautious

There’s a lot to like about Power Financial. But investors do have to keep one thing in mind.

Although the company’s stake in IGM Financial is only worth a little over $5 billion, it appears to be much of the reason why shares are selling off. In a world where low-cost solutions are recommended by just about every financial pundit, many are seeing Investors Group and its business model of selling high-cost funds as a relic of the past.

If you look at Power Financial’s recent share price compared to IGM Financial’s, they virtually mirror each other. It sure looks to me like the market is overly pricing in what it views to be toxic IGM exposure.

But at the same time, I’m not sure the troubled division is really doing so badly. IGM shares trade hands at just 11.7 times trailing earnings. IGM also pays a 6.4% dividend that’s easily covered by earnings. And the company is hard at work, trying to reinvent itself for today’s investing world.

Power Financial Corp. is one of Canada’s finest dividend stocks trading at a discounted price. Investors would be smart to ignore any IGM-related issues and load up on this proven winner while still getting a bargain.

Should you invest $1,000 in Baytex Energy right now?

Before you buy stock in Baytex Energy, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Baytex Energy wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How I’d Invest $7,000 in My TFSA for $660 in Tax-Free Annual Income

Canadians looking for ways to make the most of the new TFSA contribution room should consider investing in these two…

Read more »

Doctor talking to a patient in the corridor of a hospital.
Dividend Stocks

This Dividend King Paying 7.5% in Monthly Income Is a Must-Have

This high-yield TSX stock might not be a textbook Dividend King, but its reliable monthly payouts and improving financials make…

Read more »

path road success business
Dividend Stocks

How to Invest $50,000 of Tax-Free Cash as Canada-US Trade Uncertainty Escalates

Few Canadian stocks are as easy a choice as this one, making it perfect during volatile periods.

Read more »

monthly desk calendar
Dividend Stocks

How I’d Generate $200 in Monthly Income With a $7,000 Investment

Want to establish $200 in monthly income (or even more?) Here's an easy way to start today that will provide…

Read more »

Printing canadian dollar bills on a print machine
Dividend Stocks

Got $25,000? Turn it Into $250,000 in a TFSA as the Canadian Dollar Rises

Investing doesn't have to be risky or difficult, especially with this top stock.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

Where Will Loblaw Be in 3 Years?

Loblaw (TSX:L) stock could be a stellar performer as tariffs and headwinds move in on Canada's economy.

Read more »

customer uses bank ATM
Dividend Stocks

Where Will National Bank Be in 5 Years?

National Bank of Canada (TSX:NA) stock still looks like a great deal at these levels.

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

The Smartest Industrial Stock to Buy With $3,000 Right Now

Aecon is a value stock that's benefiting from strong infrastructure spending today and in the years to come.

Read more »