AGF Management (B) (AGF.B.TO)

Not in complete financial distress, but have spent their cash reserves buying back stock over time. Their performance in the mutual fund business has been challenged and they have been losing assets. The revenue base has been going down, which impinges on their ability to pay out financing, so have been building up a little debt. They are going to be challenged because there are new regulations coming, where investment advisors are going to have to disclose all the fees that customers are paying. People are going to start to see how much money they pay into mutual funds. This will put pressure on sales or on fees. Either would be a negative for the company.

They had a dividend cut. It is very interesting here. Down another 75 cents would be worth looking.

People hold this for the dividend. The company seems to have a long-term difficulty in gathering assets, keeping them and growing the business. There are better places to put your money.

Chart shows a steady slip of BV, so value is not coming in, but is going out. However, at $8, it is on pretty strong technical support. At this juncture, given their earnings forecasts for the next 12 months of $0.69, the FMV is quite a bit higher. Wouldn’t be surprised if we saw a bounce in the company at this juncture. Despite the long-term, the short term looks very interesting.

Cut their dividend by about 70%, which was a big surprise; because that was the only thing investors seemed to have with this company. If you own, you are left with a company that is in decline, its assets (net sales) he believes are in decline. Fundamentals and price trends have not been attractive to him. He would not be interested in buying this.

Thinks this has been entrenched management. Have always been independent and have always had a belief that they could sustain the dividend. The pressure of the TSX coming down affecting Assets under Management (AUM) made them realize they weren’t earning their dividend and they have to do something about it. Manufacturer of mutual funds, which effectively is what they are, isn’t that proprietary anymore. The sweet spot in this business is actually dealing with the customer. Give it about a month. At 5.5X EBITDA, it is pretty cheap.

Cut their dividend by 70%, which was a real surprise. Has a lot of cash on the balance sheet to fund the dividend for a number of years.

Has been in an asset decline for a few years now and losing some business on the institutional side. Retail side is not growing either. Highly Canadian equity, which has hurt them in a relative sense in the last couple of years. Dividend has been double-digit for a couple of years and he thought they would have cut by now. The thing to watch is “assets under management”. If it continues to fall, they are going to have to cut.

They have enough money to pay their dividend. Their free cash flow ratio at the end of the last quarter was 97%. Have a whole lot of cash that they can use to fund the dividend for the next 7 years. If there is a market pullback in excess of 10%, he thinks they will cut their dividend. If you think markets are going to fall, he wouldn’t own, but if you think markets are going to go higher, you can buy this as a flyer, but not too much of it.

Not as large a money manager as they used to be, nor as successful. He can’t come up with a reason to own the stock. Can only be taken over if the company agrees because they hold the voting shares.

Would be a little bit concerned about this one. The mutual fund industry is going to be affected by changes in disclosure laws, starting next year. One of the things that has to be disclosed are the fee schedules. A lot of clients are going to be in for a bit of a surprise when they see the fees that are going to be charged.

It is consolidating. He is seeing technical support at $11 going back to early 2013. If it breaks $11 and stays below 3 days then the net target is down to the previous low.

His calculated FMV based on their current earnings is about $17.50. From the current price there would appear to be some decent upside. In the meantime you have a 9.5% dividend yield. The issue is that they are paying out more in terms of dividends than they are earning. The balance sheet is sliding, and the market doesn’t like this kind of scenario. He wouldn’t be surprised to see a rally up to about $14. If it got there and you owned, he would abandon ship.

Funds management is a terrifically competitive business. It is very difficult to have a sustained advantage. This company has not had great results year after year like it needed to. This is a turnaround story at this point.

Can’t tell if the dividend is getting cut in half. The mutual fund business is good right now. It may be time for them to start looking to sell the company. There is a risk with the high fees that these guys are charging.