A Full Recovery
Last month, Canadian trust averages reached levels we haven’t seen since mid-2006. Energy trusts have led the way, thanks to soaring prices for oil and natural gas.
Strong energy prices are here to stay, at least for the next few years. But there’s a lot more to trusts’ comeback from the stress tests of the past couple years.
As one prominent Bay Street money manager put it: “It’s been Darwinian, the survival of the fittest, [but] the shakeout in the income trust universe has left a core group of high-quality income trusts and reduced the number of marginal players.”
Stronger businesses mean more durable underpinnings to this upsurge than there were in 2006. Even 2011 taxation risk continues to diminish. Last month, the CEO of Contrans Income Fund (TSX: CSS.UN, OTC: CSIUF) said he had “no plans” to convert the trucking trust to a corporation even after 2011.
Meanwhile, dozens of trusts are affirming intentions to remain big dividend payers indefinitely, no matter how they’re organized. Others are showing that converting to a corporation isn’t an automatic disaster, even if it involves a large dividend cut. And still others are actually already paying the trust tax, as the price of audacious acquisitions have transformed them into major players.
Identifying, buying and sticking with this “core group” is the key to earning big returns with trusts, both before and after 2011 taxation kicks in. And that remains my primary goal at Canadian Edge. The tradeoff for buying and holding: You have to be willing to ride out the ups and downs that even stocks of great companies will go through.
Not everything in the Canadian Edge Portfolio is going to do well at the same time, and we’ve certainly seen that in 2008. We’ve enjoyed monster returns with our energy producers and services companies and solid returns with our infrastructure-related picks and REITs. And we’ve simultaneously been mauled in several business trusts, including some that posted very strong first quarter earnings, such as Yellow Pages Income Fund (TSX: YLO.UN, OTC: YLWPF).
The bad news is there’s going to be a lot more of this kind of volatility in the months ahead. Investors are simultaneously worried about accelerating inflation and a potential recession. And although Canada’s resource base and stronger financial system are pluses, the country’s not immune from selloffs or slowdowns, as the 0.3 percent drop in first quarter GDP makes clear.
The good news, however, is far more compelling: Mainly, the underlying businesses of all our picks are thriving. That’s the clear verdict from first quarter earnings—analyzed in the May issue as well as the May 16 flash alert—and it applies even to trusts such as Yellow whose share prices have been weak.
In the near term, markets respond to myriad factors, particularly shifts in sentiment. When you’re talking about more than a year or two, however, value always shines through. As long as a trust maintains distributions—or better, increases them, as 12 of the 14 Conservative Portfolio trusts have at least once in the past year—shares will recover whatever ground they’ve lost in the early months of 2008. And when the cycle inevitably turns up again, growing value ensures they’ll push on to higher highs.
Portfolio Action
I’m not making any changes to the Canadian Edge Portfolio this month. With first quarter earnings season behind us, it’s clear several of the recommended trusts have been hurt by the weaker North American economy. Even the most affected, however, are maintaining distributions and look set to until things cycle out. And that’s the only thing they need to do to ultimately recover, even while they continue to pay us big distributions. I am, however, advising investors take some of our recent profits off the table in our oil and gas producers, both as a precaution against a drop in oil and gas prices and to rebalance your portfolio among all Canadian trust sectors.
High Yields of the Month
High Yield of the Month Newalta Income Fund (TSX: NAL-U, OTC: NALUF) is at last rewarding our patience for sticking with it all these months. First quarter earnings were strong, and future prospects look even better for this Aggressive Portfolio star. On the Conservative Portfolio side, I look at a one of the biggest disappointments of this year, Yellow Pages Income Fund, which nonetheless continues to post very strong earnings.
How They Rate
Royal Utilities Trust goes off the How They Rate Table this month, having been fully absorbed by Sherritt International for CAD12.68 per share in cash. Note that Spectra Energy Income Fund is also off, acquired by a unit of parent Spectra Energy for CAD11.25 per share in cash.
In their place, I’m adding Cathedral Energy Services Income Trust (TSX: CET.UN, OTC: CEUNF) and Student Transportation of America (TSX: STB.UN, OTC: SUDRF). Note we’re also tracking a group of Canadian corporations in the How They Rate Table. This month, we’re adding a quintet of banks to their ranks: Bank of Montreal (NYSE: BMO, TSX: BMO), Canadian Imperial Bank of Commerce (NYSE: CM, TSX: CM), Royal Bank of Canada (NYSE: RY, TSX: RY), Toronto-Dominion Bank (NYSE: TD, TSX: TD) and National Bank of Canada (TSX: NA, OTC: NTIOF).
Here are advice changes. See the How They Rate or 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-based quote services.
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 contrast to US weakness, Canada’s real estate market is holding firm, and REITs are enjoying record returns. They’re also still higher-yielding and cheaper than US REITs, and occupancy rates and rent growth are better. I look at the property market in Canada and the best REIT bets on its continued prosperity, for conservative and aggressive investors alike.
Canadian Currents
As with the US, the health of Canada’s financial system is critical to the country’s economy and stock market. CE Associate Editor David Dittman takes the sector’s current pulse and highlights a quartet we’ll be covering regularly in the How They Rate Table. (See above.)
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 were 14 distribution increases in the CE coverage universe last month but also four cuts, including Essential Energy Services. (See above.) Aeroplan Income Fund announced a 40.5 percent cut in its distribution, part of its planned conversion from trust to corporation. Keystone North America trimmed its payout 23.8 percent, as it completed the retirement of 91 percent of its former Income Participating Securities (IPS). Fast-growing InterRent Properties (TSX: IIP.UN, OTC: IIPZF) cut its payout 31.5 percent to better align the distribution with realistic cash flows.
Bay Street Beat—How the Canadian analyst community views trusts, including some of our favorites.
Stand Down, Stephane—It still looks like Canada is headed for national elections no sooner than mid-2009. Unfortunately for the opposition Liberal Party, its leader Stephane Dion continues to flounder, and his party ranks fourth of the four major parties in his home province of Quebec. Here’s more on politics in Canada.
Speaking Engagements
“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.
Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.
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) http://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 http://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
Strong energy prices are here to stay, at least for the next few years. But there’s a lot more to trusts’ comeback from the stress tests of the past couple years.
As one prominent Bay Street money manager put it: “It’s been Darwinian, the survival of the fittest, [but] the shakeout in the income trust universe has left a core group of high-quality income trusts and reduced the number of marginal players.”
Stronger businesses mean more durable underpinnings to this upsurge than there were in 2006. Even 2011 taxation risk continues to diminish. Last month, the CEO of Contrans Income Fund (TSX: CSS.UN, OTC: CSIUF) said he had “no plans” to convert the trucking trust to a corporation even after 2011.
Meanwhile, dozens of trusts are affirming intentions to remain big dividend payers indefinitely, no matter how they’re organized. Others are showing that converting to a corporation isn’t an automatic disaster, even if it involves a large dividend cut. And still others are actually already paying the trust tax, as the price of audacious acquisitions have transformed them into major players.
Identifying, buying and sticking with this “core group” is the key to earning big returns with trusts, both before and after 2011 taxation kicks in. And that remains my primary goal at Canadian Edge. The tradeoff for buying and holding: You have to be willing to ride out the ups and downs that even stocks of great companies will go through.
Not everything in the Canadian Edge Portfolio is going to do well at the same time, and we’ve certainly seen that in 2008. We’ve enjoyed monster returns with our energy producers and services companies and solid returns with our infrastructure-related picks and REITs. And we’ve simultaneously been mauled in several business trusts, including some that posted very strong first quarter earnings, such as Yellow Pages Income Fund (TSX: YLO.UN, OTC: YLWPF).
The bad news is there’s going to be a lot more of this kind of volatility in the months ahead. Investors are simultaneously worried about accelerating inflation and a potential recession. And although Canada’s resource base and stronger financial system are pluses, the country’s not immune from selloffs or slowdowns, as the 0.3 percent drop in first quarter GDP makes clear.
The good news, however, is far more compelling: Mainly, the underlying businesses of all our picks are thriving. That’s the clear verdict from first quarter earnings—analyzed in the May issue as well as the May 16 flash alert—and it applies even to trusts such as Yellow whose share prices have been weak.
In the near term, markets respond to myriad factors, particularly shifts in sentiment. When you’re talking about more than a year or two, however, value always shines through. As long as a trust maintains distributions—or better, increases them, as 12 of the 14 Conservative Portfolio trusts have at least once in the past year—shares will recover whatever ground they’ve lost in the early months of 2008. And when the cycle inevitably turns up again, growing value ensures they’ll push on to higher highs.
Portfolio Action
I’m not making any changes to the Canadian Edge Portfolio this month. With first quarter earnings season behind us, it’s clear several of the recommended trusts have been hurt by the weaker North American economy. Even the most affected, however, are maintaining distributions and look set to until things cycle out. And that’s the only thing they need to do to ultimately recover, even while they continue to pay us big distributions. I am, however, advising investors take some of our recent profits off the table in our oil and gas producers, both as a precaution against a drop in oil and gas prices and to rebalance your portfolio among all Canadian trust sectors.
High Yields of the Month
High Yield of the Month Newalta Income Fund (TSX: NAL-U, OTC: NALUF) is at last rewarding our patience for sticking with it all these months. First quarter earnings were strong, and future prospects look even better for this Aggressive Portfolio star. On the Conservative Portfolio side, I look at a one of the biggest disappointments of this year, Yellow Pages Income Fund, which nonetheless continues to post very strong earnings.
How They Rate
Royal Utilities Trust goes off the How They Rate Table this month, having been fully absorbed by Sherritt International for CAD12.68 per share in cash. Note that Spectra Energy Income Fund is also off, acquired by a unit of parent Spectra Energy for CAD11.25 per share in cash.
In their place, I’m adding Cathedral Energy Services Income Trust (TSX: CET.UN, OTC: CEUNF) and Student Transportation of America (TSX: STB.UN, OTC: SUDRF). Note we’re also tracking a group of Canadian corporations in the How They Rate Table. This month, we’re adding a quintet of banks to their ranks: Bank of Montreal (NYSE: BMO, TSX: BMO), Canadian Imperial Bank of Commerce (NYSE: CM, TSX: CM), Royal Bank of Canada (NYSE: RY, TSX: RY), Toronto-Dominion Bank (NYSE: TD, TSX: TD) and National Bank of Canada (TSX: NA, OTC: NTIOF).
Here are advice changes. See the How They Rate or 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-based quote services.
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.
- Aeroplan Income Fund (TSX: AER.UN, OTC: AOPIF)—Hold to sell. This low-yielding trust is even less interesting as a corporation, particularly with its customers tightening their belts.
- Bonterra Energy Fund (TSX: BNE.UN, OTC: BNEUF)—Buy @28 to hold. Rising oil prices have pushed this small, high-cost producer well past my buy target.
- Crescent Point Energy Trust (TSX: CPG.UN, OTC: CPGCF)—Buy @33 to hold. Rising oil prices have pushed this solid trust far above my buy target. Even the great ones aren’t worth chasing.
- Essential Energy Services Trust (TSX: ESN.UN, OTC: EEYUF)—Sell to hold. Conditions in the energy patch appear to have bottomed. This trust cut its dividend by another 70 percent this month to 1.5 cents a share. But it looks like the worst is over.
- InStorage REIT (TSX: IS.UN, OTC: IGREF)—Hold to buy @5. The storage business is growing rapidly. This REIT is small but well positioned and cheap.
- Keystone North America (TSX: KNA, OTC: KYSNF)—Hold to buy @1.20. The company has effectively dissolved its income participating securities (IPS) by inducing 91 percent of holders to swap the bond portion for five common shares. The result is much less financial risk and greater growth potential.
- Mullen Group Income Fund (TSX: MTL.UN, OTC: MNTZF)—Hold to buy @22. Strong first quarter results show the trust has adapted well to a tough environment.
In contrast to US weakness, Canada’s real estate market is holding firm, and REITs are enjoying record returns. They’re also still higher-yielding and cheaper than US REITs, and occupancy rates and rent growth are better. I look at the property market in Canada and the best REIT bets on its continued prosperity, for conservative and aggressive investors alike.
Canadian Currents
As with the US, the health of Canada’s financial system is critical to the country’s economy and stock market. CE Associate Editor David Dittman takes the sector’s current pulse and highlights a quartet we’ll be covering regularly in the How They Rate Table. (See above.)
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 were 14 distribution increases in the CE coverage universe last month but also four cuts, including Essential Energy Services. (See above.) Aeroplan Income Fund announced a 40.5 percent cut in its distribution, part of its planned conversion from trust to corporation. Keystone North America trimmed its payout 23.8 percent, as it completed the retirement of 91 percent of its former Income Participating Securities (IPS). Fast-growing InterRent Properties (TSX: IIP.UN, OTC: IIPZF) cut its payout 31.5 percent to better align the distribution with realistic cash flows.
Bay Street Beat—How the Canadian analyst community views trusts, including some of our favorites.
Stand Down, Stephane—It still looks like Canada is headed for national elections no sooner than mid-2009. Unfortunately for the opposition Liberal Party, its leader Stephane Dion continues to flounder, and his party ranks fourth of the four major parties in his home province of Quebec. Here’s more on politics in Canada.
Speaking Engagements
“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.
The natural setting is, however, among the most exciting in the US. Venture west for the San Francisco Money Show Aug. 7-10, 2008, and conduct your own field study.
Neil, Elliott and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.
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) http://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 http://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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