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AGF remains risky despite hefty dividend

Few analysts are convinced the money manager is close to a turnaround


Shares in AGF Management Ltd. come with a hefty dividend - and plenty of questions.

After tumbling about 70 per cent from their high of five years ago, AGF's B shares hit a 52-week intraday low on Monday and are now paying investors a dividend yield of nearly 10 per cent. But few analysts are convinced that the money manager is close to a turnaround.

That means investors tempted by the low price and fat dividend must be both brave and patient. AGF has been aggressively buying back its own shares, but observers warn that the firm's assets under management may fall even further, while volatile stock markets could scare clients away from the equity funds that make up the lion's share of its offerings.

"They have to do something internally to stem the bleeding," said CIBC World Markets analyst Paul Holden. "I am concerned about the pace of the decline in assets ... If they cut the dividend or were not buying back shares, I think the share price would be lower."

The firm, whose mutual funds have suffered from net redemptions for several years, was dealt a new blow last April when its star emerging markets manager Patrica Perez-Coutts jumped ship to join the Canadian unit of rival Westwood Holdings Inc.

AGF reported weaker-than-expected profit in the quarter, as total net outflows from retail and institutional portfolios rose to $2.4-billion, and assets under management tumbled nearly 15 per cent to $41.2-billion from a year earlier.

Analysts were caught off guard when AGF said it expected $1.5-billion in additional net outflows from its institutional assets in the fourth quarter, on top of the $1.7-billion in the previous period. This business, which caters to clients such as pension funds and wealthy investors, had been touted as a new growth engine.

But a bigger surprise was that the institutional redemptions came not from the emerging-market portfolios, but from other areas, such as the quantitative strategies run by AGF's Highstreet Asset Management subsidiary.

"We have installed new leadership [at Highstreet]," improved the firm's stock-screening strategies and made new hires on the research team to improve performance, AGF's chief executive officer Blake Goldring said during last month's conference call.

Analysts are still concerned about the possibility of assets leaving portfolios run by Ms. Perez-Coutts and several team members who left with her. Institutional investors often wait six to nine months after a manager change before making a decision on whether to pull the plug.

The cautionary outlook on AGF is reflected in analysts' recommendations. Eight out of 11 have "hold" ratings on the stock, according to Bloomberg News. Their 12-month target prices on AGF's B shares range from $9.50 a share to $13. The stock, which fell to an intraday low of $10.71 a share on Monday, closed at $10.83 on the Toronto Stock Exchange.

The third-quarter results do not "inspire a high degree of investor confidence in what could ultimately play out as a turnaround story," said Scotia Capital analyst Phil Hardie.

AGF has stumbled on multiple woes, including performance problems in some funds, as well as the lack of a company-owned distribution network that can help sell its offerings. Unlike rivals such as CI Financial Corp., which have acquired financial planning arms, AGF sells its products solely through independent advisers.

There are some hints that better days lie ahead. A recent improvement in fund performance and the sale of AGF's trust business for $422-million "may lead to a much-awaited turning point for AGF," Mr. Hardie suggested in a report.

National Bank Financial analyst Shubha Khan projects a payout ratio (dividends as a percentage of cash flow) of 94 per cent next year, but he sees no immediate threat of a cut to the annual dividend of $1.08 a share, given AGF's new cash resources from the trust business sale.

If shortfalls do appear, AGF could close the gap by acquiring another money manager to provide a new revenue stream, or by buying back more of its own shares to lower the required payout, he said.

Still, it's "a little bit early to be buying the stock for yield," Mr. Khan said. "AGF is still navigating through a period of heightened risk. There may be a more attractive opportunity to buy at a later point in case the shares drop further."

© 2007 The Globe and Mail. All rights reserved.

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