After discovering Dividend Matters blog, I was instantly hooked! The blogger of Dividend Matters, Average Joe, goes through various valuation methods of dividend paying companies and tells us if it's a good buy at current prices. I personally have been using his "average dividend high" method for a couple years now.. more on this in another post. Anyways, the other day I emailed Average Joe requesting a valuation of one of my favorite dividend paying stocks, PWF-TO. He was kind enough to write a guest post so that you guys can also learn from his methods.
FrugalTrader requested that I have a look at one of his favorite dividend paying stocks – Power Financial Corporation (TSE: PWF). So let's go ahead and put this stock through my normal process and see if it deserves a spot in a portfolio of superior dividend yielding stocks.
Power Financial Corporation is a diversified management and holding company with significant interest in the following companies:
- Great-West Lifeco
- London Life
- Canada Life
- Great-West Life and Annuity
- Putnam Investments
- IGM Financial
- Investors Group
- Mackenzie Financial
- Pargesa Group
- Market capitalization of $27.85B.
As always, I start with a look at the return on invested capital. I can see that management has been able to consistently deliver an ROIC above 10% for each of the last 10 years. The 5 year average ROIC is 12.80%.
Management has been able to deliver very consistent return on equity over the last 10 years. The 10 year average ROE is 18.87%. The 5 year average ROE is 19.27%. As you can see, management has been able to leverage their debt so that the ROE is consistently higher than the ROIC. Total debt makes up 25% of capital.
The equity growth rate has been incredibly consistent in and around 13%. The 9 year rate is 13.83%. The 5 year rate is 13.43%. The 3 year rate drops slightly to 12.18% and last year's equity growth rate was 22.25%.
Earnings per share growth rate follows a similar trend to the equity growth rate. The 9 year EPS growth rate is 14.60%. It increases to 19.14% over the last 5 years. It drops to 12.94% over the last 3 years. But last year's EPS growth rate was excellent at 28.38%.
Surprise, surprise. The sales growth rates follow the exact same pattern! At least they are consistent! The 9 year sales growth rate is 14.28%. It increases to 15.91% over the last 5 years. It drops to 11.42% over the last 3 years. And last year's sales growth rate was 26.8%.
The current dividend yield is 2.94%. This is above the 2.57% dividend yield of the S&P/TSX Composite index. I would consider this an average dividend yield.
However, the beauty comes in the dividend growth rates! PWF has been an excellent dividend grower. The 9 year dividend growth rate is 18.84%. The 5 year rate is 18.16%. The 3 year rate is 18.51%. Talk about consistent! Unfortunately, last year's dividend growth rate dipped to 14.94%. Remember that a 15% yearly increase in dividends translates into a doubling of your dividend every 5 years!
The dividend payout ratio has increased form 25.88% in 1997 to 34.01% in 2006. I would consider this a conservative payout ratio and still gives management room to maneuver and continue its amazing dividend growth.
Cash flow growth rates have been consistent with the rest of the growth rates in that there is a dip in the 3 year rate and a bounce back in last year's rate.
The last step of my process is to determine a model price for this stock. I use 3 methods to value a dividend yielding stock
From a historical dividend yield perspective, the current 2.94% dividend yield is on the low side. The 10 year average high dividend yield is 3.16% and the 5 year average high dividend yield is 3.18% (dare I say, consistent?). If I demand the 5 year average high dividend yield, then the model price is $36.47. At the current price of $39.51, Mr. Market is demanding a premium of 8.32% over our model price.
Mr. Benjamin Graham would agree with that analysis. The Graham number is $31.19. That amounts to a premium of 26.69%.
For my discounted present value method, I used the following inputs:
- future EPS growth rate of 13.43% (this is the 5 year equity growth rate. Unfortunately, I was unable to find any analysts with a forecast to compare my estimated EPS growth rate.)
- future P/E of 12.80 (this is the 5 year average P/E and is slightly more conservative than the current P/E of 13)
- dividend yield of 3.18% (the 5 year average high dividend yield)
- future dividend growth rate of 14.94% (last year's dividend growth rate which is more conservative than the 18% that has been normally achieved.)
With this information, my model price works out to $60.51. That would mean that the stock is currently selling at a discount of 34.7%! However, one of my assumptions is that I must earn a minimum dividend yield of 3.18% (the 5 year average high dividend yield). At $60.51, that is not possible. However, it does show that if we did purchase the stock with a dividend yield of 3.18%, we would get fantastic growth.
Here are my PWF calculations.
Here is the 1 year stock price chart:
As you can see, the stock has come down during the recent selloff.
I would say that Power Financial Corporation does belong in a portfolio of superior dividend yielding stocks. I also believe that it is currently over priced and would wait for the model price of $36.47 as an entry point.
I hope that you have enjoyed this analysis and that it provides some food for thought during your own adventures in investing.
Full Disclosure : I do not own shares in PWF, but FrugalTrader does.
So, Average Joe approves of my vouch for PWF! If you have any questions regarding his analysis, please leave them in the comments.If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).