Vote of Confidence
Canada’s currency is likely to outperform the US dollar in coming years: That’s the prognosis of none other than the richest man in the world, investor Warren Buffett.
In my view, a strong loonie is inevitable as long as energy and other natural resources are in a bull market. And they will be until there’s real permanent demand destruction on a global scale.
The price spikes we’re seeing when demand is interrupted in places such as Nigeria, for example, is positive proof of just how stretched the world market for oil is. And natural gas, coal, potash, iron ore and a host of other commodities aren’t far behind.
Robust demand for natural resources in the 21st century means a strong economy in Canada, just as it did back in the ’70s. Not every sector is thriving, as the large number of How They Rate sells and Dividend Watch List members clearly indicates. And the slowdown in the US has taken its toll on Canada’s overall economic growth rate.
But as fourth quarter and now first quarter earnings reports are making clear, Canada’s challenges pale compared with ours. And as North America cycles out of this slump, it’s resource-backed Canada that will bounce first and furthest.
Last month, nine more income trusts hiked their payouts—versus just one cut—and more will follow on the heels of strengthening first quarter profits. Canada’s appeal also extends to corporations. This month, we’ve added eight to How They Rate coverage, most of which also boast generous, growing yields.
Not surprising, our biggest winners in 2008 hail from the stress-tested oil and gas producer sector. Gas’ move to more than USD11 per million British thermal units has sparked Advantage Energy Trust (NYSE: AAV, TSX: AVN.UN) and Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) to year-to-date gains of 46 percent and 59 percent, respectively. All-weather ARC Energy Trust (TSX: AET.UN, OTC: AETUF) and Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF) have broken through pre-Halloween 2006 highs.
I look for the favorable trend in energy to continue. But trusts are also starting to move higher as they address 2011 taxation issues head on. The myth of a future trust doomsday was shattered this year, as Trinidad Drilling (TSX: TDG, OTC: TDGCF) surged more than 30 percent after converting early to a corporation. Now we’re starting to see a host of others affirm they’ll remain big dividend payers after 2011, as either trusts or corporations.
The Conservative government has already cut the overall prospective trust tax rate once, from 31.5 percent to 28 percent. Now it’s adjusting its provincial component downward from the statutory 13 percent to that of the individual jurisdictions themselves. The rate in Alberta—home to most oil and gas producers—is just 10 percent.
Unlike Washington, Ottawa is running a big-time budget surplus, and I fully expect more ratcheting down of the top rate by 2011, if the trust tax isn’t scrapped entirely. The most important moves, however, are going to be made by the trusts themselves, and there are as many potential strategies as there are individual entities.
As stated recently by two partners of Burnet Duckworth & Palmer LLP—the major law firm advising trusts—the motivation for the recent rash of oil and gas mergers is to acquire the size necessary to “undertake big projects” needed to maintain a low-growth, dividend-paying model. In short, trusts backed by healthy, growing businesses are going to keep paying super dividends. And the clearer that becomes, the less uncertainty trusts will trade under and the higher their shares will rise.
Identifying healthy, growing businesses has been the primary focus of Canadian Edge since its first issue in summer 2004. Focusing on quality didn’t save us from losses following the Halloween 2006 tax shock or in tough 2007. But we’ve survived the stress tests, held onto our dividends and are now starting to make up a lot of lost ground in a hurry.
We rarely buy the highest-yielding trusts. We’re not concerned with riding every month’s biggest gainers or avoiding every dip. Rather, we’re sticking with sustainable high yields and steady wealth-building. And that’s how we’re going to keep earning the price of your subscription as the best trusts start to tap their potential again.
Portfolio Action
The Canadian Edge Portfolio is near capacity. But there’s room for one more Aggressive Portfolio holding. This month, I’m adding Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF), a producer trust heavily weighted toward natural gas that just declared its intention to outgrow its potential 2011 tax liability and maintain its 12 percent-plus distribution well beyond.
High Yields of the Month
Both of my High Yield of the Month picks are stars of the energy patch. Daylight Resources Trust is a new addition to the Aggressive Portfolio. In contrast, Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF) is a charter member of the Conservative Portfolio, safe enough for even the most risk averse. It’s also the highest percentage way to cash in on the torrid growth of Canada’s oil sands development.
How They Rate
Spectra Energy Income Fund is now off the How They Rate list. The trust has been acquired by a unit of parent Spectra Energy for cash. By now investors should have received CAD11.25 per share, or roughly USD11.10. Also, Wellco Energy Services is now part of Peak Energy Trust (TSX: PES.UN, OTC: PKGFF) and no longer trades individually. And Royal Utilities Trust has been fully absorbed by Sherritt International Corp. Shareholders should have received CAD12.68 in cash (USD12.50). I’ll be dropping it from How They Rate next issue.
Note that we’re now tracking a group of eight Canadian corporations in How They Rate. These are discussed further in today’s Canadian Currents. Look for this coverage to increase in coming years as more income trusts convert and as we look for plays on other areas of the robust Canadian economy where there are no trusts. We’re also now tracking Bird Construction Income Fund (TSX: BDT.UN, OTC: BIRDF), a buy recommendation from this month’s Feature Article.
Here are advice changes. See How They Rate or the Portfolio tables for changes in buy targets. Note price and yield information is updated every 15 minutes in both tables.
Get into the habit of using this service, particularly as a reality check when errors occur with US quote-based services. Last month, for example, several US systems left a decimal point off the price of Keyera Facilities Income Fund (TSX: KEY.UN, OTCL KEYUF) and then put it back on the next day, creating the erroneous impression the shares had dropped 90 percent and gained it all back the next day. Don’t be fooled.
Also note the change in column four of the table, which shows dividend frequency and the most likely way each trust will minimize 2011 taxation. “Foreign” indicates non-Canadian income, which isn’t taxed. “Pools” indicate tax pools used primarily by energy producers, which shield income dollar for dollar. “Depreciation” indicates businesses with large, noncash expenses that can be used to shelter cash flow. “None” indicates no visible method of avoiding 2011 taxes, though some trusts have stated their intention to simply outgrow their future liability and maintain distributions.
In the next 20 years, the world will spend USD40 trillion-plus on basic infrastructure. Canada not only has the need, but it’s arguably the best-funded country to pay its tab. I lay out the opportunity, ranging from energy production facilities to schools and government buildings. And I show how high-income investors can play it with builders, miners and operators, many of which are already in the CE Portfolio.
Canadian Currents
We’ve spotlighted Canadian corporations before in Canadian Currents. This issue, we’re taking our coverage to a new level with regular How They Rate tracking. CE Associate Editor David Dittman highlights our favorites to buy now, most of which are high yielding despite not being organized as trusts.
Tips on Trusts
This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section.
Dividend Watch List—There was only one distribution cut in the CE coverage universe last month: Big Rock Brewery Income Trust (TSX: BR.UN, OTC: BRBMF). Keystone North America (TSX: KNA.UN, OTC: KYSNF) looks dead set on a cut, however, whether or not it succeeds in getting two-thirds of its income participating securities holders to convert to all common stock. And TimberWest Forest Corp’s (TSX: TWF.UN, OTC: TWTUF) distribution is being severely stress tested by the very weak conditions in the North American forestry industry. On the bright side, a slew of companies are coming off the Watch List thanks to improving earnings and surging natural resource prices, including: Advantage Energy Trust, Daylight Resources Trust, Fording Canadian Coal (TSX: FDG.UN, NYSE: FDG), Paramount Energy Trust, Primary Energy Trust (TSX: PRI.UN, OTC: PYGYF), True Energy Trust (TSX: TUI.UN, OTC: TUIJF) and Westshore Terminals (TSX: WTE.UN, OTC: WTSHF).
Bay Street Beat—How the Canadian analyst community views trusts, including some of our favorites.
A Simple Hedge—Gain from the rising value of the Canadian dollar with this exchange traded fund.
More Information
The following is a regular repeat from prior issues.
Use our live quote feed on the How They Rate Table for US dollar prices of trusts intraday. For other information, go directly to a trust’s website by clicking on its name in the table. Clicking on the Toronto symbol (suffix “.UN”) will take you to the web site of our Canadian partner Toronto-based MPL Communications (133 Richmond St. West, Toronto M5H 3M8) www.adviceforinvestors.com, which has price charts and access to press trust releases. For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on income and royalty trusts. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto Globe & Mail features the “Globe Investor” section with all the latest news on trusts. Dominion Bond Rating Service is the pre-eminent credit rater for trusts. The Bank of Canada Web site features a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.
Roger Conrad
Editor, Canadian Edge
In my view, a strong loonie is inevitable as long as energy and other natural resources are in a bull market. And they will be until there’s real permanent demand destruction on a global scale.
The price spikes we’re seeing when demand is interrupted in places such as Nigeria, for example, is positive proof of just how stretched the world market for oil is. And natural gas, coal, potash, iron ore and a host of other commodities aren’t far behind.
Robust demand for natural resources in the 21st century means a strong economy in Canada, just as it did back in the ’70s. Not every sector is thriving, as the large number of How They Rate sells and Dividend Watch List members clearly indicates. And the slowdown in the US has taken its toll on Canada’s overall economic growth rate.
But as fourth quarter and now first quarter earnings reports are making clear, Canada’s challenges pale compared with ours. And as North America cycles out of this slump, it’s resource-backed Canada that will bounce first and furthest.
Last month, nine more income trusts hiked their payouts—versus just one cut—and more will follow on the heels of strengthening first quarter profits. Canada’s appeal also extends to corporations. This month, we’ve added eight to How They Rate coverage, most of which also boast generous, growing yields.
Not surprising, our biggest winners in 2008 hail from the stress-tested oil and gas producer sector. Gas’ move to more than USD11 per million British thermal units has sparked Advantage Energy Trust (NYSE: AAV, TSX: AVN.UN) and Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) to year-to-date gains of 46 percent and 59 percent, respectively. All-weather ARC Energy Trust (TSX: AET.UN, OTC: AETUF) and Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF) have broken through pre-Halloween 2006 highs.
I look for the favorable trend in energy to continue. But trusts are also starting to move higher as they address 2011 taxation issues head on. The myth of a future trust doomsday was shattered this year, as Trinidad Drilling (TSX: TDG, OTC: TDGCF) surged more than 30 percent after converting early to a corporation. Now we’re starting to see a host of others affirm they’ll remain big dividend payers after 2011, as either trusts or corporations.
The Conservative government has already cut the overall prospective trust tax rate once, from 31.5 percent to 28 percent. Now it’s adjusting its provincial component downward from the statutory 13 percent to that of the individual jurisdictions themselves. The rate in Alberta—home to most oil and gas producers—is just 10 percent.
Unlike Washington, Ottawa is running a big-time budget surplus, and I fully expect more ratcheting down of the top rate by 2011, if the trust tax isn’t scrapped entirely. The most important moves, however, are going to be made by the trusts themselves, and there are as many potential strategies as there are individual entities.
As stated recently by two partners of Burnet Duckworth & Palmer LLP—the major law firm advising trusts—the motivation for the recent rash of oil and gas mergers is to acquire the size necessary to “undertake big projects” needed to maintain a low-growth, dividend-paying model. In short, trusts backed by healthy, growing businesses are going to keep paying super dividends. And the clearer that becomes, the less uncertainty trusts will trade under and the higher their shares will rise.
Identifying healthy, growing businesses has been the primary focus of Canadian Edge since its first issue in summer 2004. Focusing on quality didn’t save us from losses following the Halloween 2006 tax shock or in tough 2007. But we’ve survived the stress tests, held onto our dividends and are now starting to make up a lot of lost ground in a hurry.
We rarely buy the highest-yielding trusts. We’re not concerned with riding every month’s biggest gainers or avoiding every dip. Rather, we’re sticking with sustainable high yields and steady wealth-building. And that’s how we’re going to keep earning the price of your subscription as the best trusts start to tap their potential again.
Portfolio Action
The Canadian Edge Portfolio is near capacity. But there’s room for one more Aggressive Portfolio holding. This month, I’m adding Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF), a producer trust heavily weighted toward natural gas that just declared its intention to outgrow its potential 2011 tax liability and maintain its 12 percent-plus distribution well beyond.
High Yields of the Month
Both of my High Yield of the Month picks are stars of the energy patch. Daylight Resources Trust is a new addition to the Aggressive Portfolio. In contrast, Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF) is a charter member of the Conservative Portfolio, safe enough for even the most risk averse. It’s also the highest percentage way to cash in on the torrid growth of Canada’s oil sands development.
How They Rate
Spectra Energy Income Fund is now off the How They Rate list. The trust has been acquired by a unit of parent Spectra Energy for cash. By now investors should have received CAD11.25 per share, or roughly USD11.10. Also, Wellco Energy Services is now part of Peak Energy Trust (TSX: PES.UN, OTC: PKGFF) and no longer trades individually. And Royal Utilities Trust has been fully absorbed by Sherritt International Corp. Shareholders should have received CAD12.68 in cash (USD12.50). I’ll be dropping it from How They Rate next issue.
Note that we’re now tracking a group of eight Canadian corporations in How They Rate. These are discussed further in today’s Canadian Currents. Look for this coverage to increase in coming years as more income trusts convert and as we look for plays on other areas of the robust Canadian economy where there are no trusts. We’re also now tracking Bird Construction Income Fund (TSX: BDT.UN, OTC: BIRDF), a buy recommendation from this month’s Feature Article.
Here are advice changes. See How They Rate or the Portfolio tables for changes in buy targets. Note price and yield information is updated every 15 minutes in both tables.
Get into the habit of using this service, particularly as a reality check when errors occur with US quote-based services. Last month, for example, several US systems left a decimal point off the price of Keyera Facilities Income Fund (TSX: KEY.UN, OTCL KEYUF) and then put it back on the next day, creating the erroneous impression the shares had dropped 90 percent and gained it all back the next day. Don’t be fooled.
Also note the change in column four of the table, which shows dividend frequency and the most likely way each trust will minimize 2011 taxation. “Foreign” indicates non-Canadian income, which isn’t taxed. “Pools” indicate tax pools used primarily by energy producers, which shield income dollar for dollar. “Depreciation” indicates businesses with large, noncash expenses that can be used to shelter cash flow. “None” indicates no visible method of avoiding 2011 taxes, though some trusts have stated their intention to simply outgrow their future liability and maintain distributions.
- Boralex Power Income Fund (TSX: BPT.UN, OTC: BLXJF)—Hold to buy @6. First quarter earnings indicate the lower distribution rate should be sustainable. The high level of distribution and price under book value limit downside.
- Cineplex Galaxy Income Fund (TSX: CGX.UN, OTC: CPXGF)—Hold to buy @18. Online ticket sales are up 185 percent year-over-year, and the first quarter was a blockbuster.
- Labrador Iron Ore Royalty (TSX: LIF.UN, OTC: LBRYF)—Hold to buy @50. The iron ore market is among the hottest in the world, and this trust’s royalty stream is conjoined with global giant Rio Tinto.
- Noranda Income Fund (TSX: NIF.UN, OTC: NNDIF)—Hold to buy @9. First quarter distributable cash flow fell short, but the shares have sunk to price in risk. The trust’s royalty stream is tied to a zinc processing facility run by solid miner Xstrata.
- Priszm Income Fund (TSX: QSR.UN, OTC: PSZMF)—Buy @7 to hold. A big shortfall in first quarter distributable cash flow should be temporary, but it makes it very clear that the recovery is going to take time.
- True Energy Trust (TSX: TUI.UN, OTC: TUIJF)—Sell to hold. Rising natural gas prices make a distribution cut unlikely in 2008 and make a takeover more likely.
In the next 20 years, the world will spend USD40 trillion-plus on basic infrastructure. Canada not only has the need, but it’s arguably the best-funded country to pay its tab. I lay out the opportunity, ranging from energy production facilities to schools and government buildings. And I show how high-income investors can play it with builders, miners and operators, many of which are already in the CE Portfolio.
Canadian Currents
We’ve spotlighted Canadian corporations before in Canadian Currents. This issue, we’re taking our coverage to a new level with regular How They Rate tracking. CE Associate Editor David Dittman highlights our favorites to buy now, most of which are high yielding despite not being organized as trusts.
Tips on Trusts
This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section.
Dividend Watch List—There was only one distribution cut in the CE coverage universe last month: Big Rock Brewery Income Trust (TSX: BR.UN, OTC: BRBMF). Keystone North America (TSX: KNA.UN, OTC: KYSNF) looks dead set on a cut, however, whether or not it succeeds in getting two-thirds of its income participating securities holders to convert to all common stock. And TimberWest Forest Corp’s (TSX: TWF.UN, OTC: TWTUF) distribution is being severely stress tested by the very weak conditions in the North American forestry industry. On the bright side, a slew of companies are coming off the Watch List thanks to improving earnings and surging natural resource prices, including: Advantage Energy Trust, Daylight Resources Trust, Fording Canadian Coal (TSX: FDG.UN, NYSE: FDG), Paramount Energy Trust, Primary Energy Trust (TSX: PRI.UN, OTC: PYGYF), True Energy Trust (TSX: TUI.UN, OTC: TUIJF) and Westshore Terminals (TSX: WTE.UN, OTC: WTSHF).
Bay Street Beat—How the Canadian analyst community views trusts, including some of our favorites.
A Simple Hedge—Gain from the rising value of the Canadian dollar with this exchange traded fund.
More Information
The following is a regular repeat from prior issues.
Use our live quote feed on the How They Rate Table for US dollar prices of trusts intraday. For other information, go directly to a trust’s website by clicking on its name in the table. Clicking on the Toronto symbol (suffix “.UN”) will take you to the web site of our Canadian partner Toronto-based MPL Communications (133 Richmond St. West, Toronto M5H 3M8) www.adviceforinvestors.com, which has price charts and access to press trust releases. For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on income and royalty trusts. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto Globe & Mail features the “Globe Investor” section with all the latest news on trusts. Dominion Bond Rating Service is the pre-eminent credit rater for trusts. The Bank of Canada Web site features a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.
Roger Conrad
Editor, Canadian Edge
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