AGF Managment Limited (TSX: AGF-B)

The Company

AGF Managment Limited is a global wealth management company operating in 3 segments: investment management and advisory services (selling mutual funds and giving personal financial planning) plus the distribution of AGF investment products, trust company operations and 'other'.

They have a family of mutual funds but also manage assets for institutional investors. The trust business operates as a complementary business offering GIC's, loans and mortgages.

So they are mostly in the investment side of the financial market.

They announced the sale of the trust company on June 6th to allow the company to concentrate on investment management.

Financials

Earnings

AGF has not had a loss in the last 12 years (the years I have numbers for) which is one of those things that always makes me want to look further. However, they do not have consistent earnings growth. The income has ranged from $0.80 a share to $1.93. This is a predictable company, in that we can probably assume consistent profits for the next 10 years however that's it. We cannot predict what they will be except that they will be in this range.

On a short-term note, profits so far this year are down 21% which if this continues for the last half of the year will result in a EPS at the end of the year of $0.96. Essentially they are blaming the global economy for this. I do not believe that once the global economy comes back on track though, that this will be a consistent growth company but rather a steady profits company.

Return on Equity

Return on equity follows the same pattern as earnings essentially. In the range of 5% to 16 %. Mostly in the range of 10 to 12%. This makes predictability difficult.

Cash Flow

In the last 7 years (the years I have numbers for) they have had positive cash flow from operations in all years but the last one. In 4 out of those 7 years, they had positive cash flows over all. The operating cash flow so far this year appears to be positive but they did sell off that trust business.

Debt

AGF has a quick ratio of 0.008 and a current ratio of 1.12. In looking at their balance sheet, the 'assets classified as discontinued operations' is by far the largest. This appears to be the result of the sale of the trust business. 

Their debt equity ratio 3.45 which is high. If you exclude non-interest bearing liabilities (as MSN does) the debt equity ratio is a nicer 0.46.

Shares Outstanding

The shares outstanding were stable around the 89 million mark with a jump to 95 million last year. It looks like this may have been the result of stock options exercised. They do have approval to repurchase shares and have done so.

Financials Conclusion

I'm not thrilled with the financials of this company. The earnings are always positive but not predictable in their growth pattern. ROE is all over the place. The operating cash flow is usually good. The quick and current ratios aren't great and the debt equity is quite high in my opinion (although the 0.46 isn't bad when removing the non-interest bearing liabilities).

Having said all that, I'm not writing this company off completely either. They may be (and actually it turns out are) a pretty good income play.

The Business

Competition

AGF's competition would be other mutual fund companies like Investors Group, the banks which have their own products, etc.

Risks

Essentially, their business will be affected by the global economy and has been. The short term, this will probably continue to affect their profits.

Expected Cash Flows

Dividends

This is where this company looks great. They pay out a dividend of $1.08 per share. They have never paid out more then they've made but I suspect 2012 will be the first year they do as their trailing EPS is 1.07 so unless they grow instead of shrink income in the next 2 quarters, they will have paid out more than they've made.

They have also increased their dividend every year since 2005. This last year they just increased their dividend by a penny and given the year they are having, I suspect next year it might actually go down.

Capital Appreciation

Honestly, I wouldn't expect much in the way of capital appreciation. The earnings do not grow consistently. If one had this stock (and I do), the best case scenario would be to get out when the market sees one outstanding year. That probably won't happen for a few years.

Returns Analysis

Initial Rate of Return

The current price is $11.82 and the trailing EPS is 1.07 so the Initial rate of return is 9%. This is respectable but if the decrease of 21% in profits holds up for the rest of the year, the EPS will be about $0.96 which is an initial ROR of 8%. Still respectable.

Total Dividends

I cannot do my usual analysis here because ROE and earnings growth are not predictable. SO I could assume that the dividends will remain the same for the next 10 years. This would be conservative in my opinion since even though, in the short term, I would expect them to lower dividends to avoid paying out more then they make, in the longer term, the economy will recover and so will their profits. So if we say they contine to pay out $1.08 for the next 10 years, that's a total dividend of $10.80 on an initial investment of $11.82 for year over year return of 9.6%

Future Price

I don't expect much in the way of a change in future price. I suppose I could take the 52 week high and assume at some point in the future it would reach that point and I could get out. If it did reach 18.15 again, the dividend yield would be 5.7% and I may rethink this. For now it's an income play at 9.6%.

ROE Analysis

Due to the lack of predictability of ROE, I don't feel ok doing this analysis.

Returns Conclusion

AGF, in my opinion, is a pure income play. I fully expect them to reduce their dividend to at least $0.90 a share. This would be a dividend yield of 7.6% which is still respectable. After that, once the world economy gets back in gear (which I optimistically believe is inevitable), that dividend should increase with profits coming back above the $1.10/share mark.

Current Holdings:

I currently hold 300 shares of AGF-B which I purchased at an average cost of $11.41 (total investment $3423). My expected annual dividend should be about $324 assuming that they do not lower their dividend rate. If they lower it to 0.90 then I will make $270 next year. I am fairly comfortable at this level of investment on this one. I don't expect the price to go anywhere although I'd enjoy a brief manic phase in the market to take it up to $14-15 but not holding my breath. I may invest another $600 in the near future...