Investors Group appetizing despite indigestion risk

Money Digest, June, 2001 by Patrick Mckeough

Acquisition of Mackenzie Financial may cause short-term discomfort

Investors Group (TSE: IGI; Recent price: $20; Rating: above average) has acquired rival Mackenzie Financial for $4.15 billion.

The takeover solidifies Investors Group as Canada's largest mutual fund company. With assets under management of $85 billion and two million clients, it's 2.2 times bigger than its nearest competitor. Investors believes cost savings of the merger will add to its earnings in two years. Between now and then, however, it's likely to run into short-term digestion problems with this acquisition.

Prior to the takeover, Investors was already a top Canadian financial services company. It offers a wide range of products (mutual funds, insurance, fixed income securities, annuities, mortgages and loans) to more than a million retail clients, through its own network of 3,500 financial planners and fund salespeople in over 100 offices across Canada. Investors Group recently began selling funds from other companies. It is also taking steps to expand its product distribution.

Power Financial Corp. owns 67.7% of Investors Group. Last November, Investors Group and London Life (also controlled by Power Financial) teamed up with Canadian Imperial Bank of Commerce in a long-term distribution pact. Investors Group will soon offer its customers CIBC banking services such as deposit accounts, credit cards and bill payment services. It will also sell London Life's insurance products. Investors Group's mutual funds and other services will be marketed to London Life's clients as well as customers of President's Choice Financial, the storefront and electronic bank that CIBC operates with grocery retailer Loblaw. This deal greatly expands Investors Group's distribution network, at low cost.

Investors Group's revenues climbed from $687.2 million in 1996 to $1.2 billion in 2000, or 12.1% compounded annually. Earnings grew at a compound rate of 19.3% from $117.5 million or $0.56 a share in 1996 to $284.0 million or $1.35 a share in 2000. Assets under management at December 31, 2000 totaled $48 billion, up 10.3% from $43.5 billion in 1999.

The company's stock has stayed between $14 and $28 since mid-1997, mainly due to intensifying mutual fund competition and finance industry consolidation. The Mackenzie takeover makes great long-term sense in this situation. However, many brokers and fund salespeople may quit selling Mackenzie funds to their clients, now that these funds are a part of a rival financial institution. Former Investors Group representatives may feel particularly averse to the group, since Investors has sometimes had acrimonious relations with departing employees.

Investors' earnings this year may make little progress from last year's $1.35 a share. However, it trades at just 14.8 times that figure. The company has just raised the quarterly dividend from $0.16 to $0.175. The stock now yields 3.5%.

Investors Group is a buy, but only for patient investors.

Patrick McKeough is a fee-based investment manager and a publisher of investor newsletters. This article is extracted from The Successful Investor (ste. 977, 6021 Yonge St.,