“Rarest Security on Earth: Average 17.2% Yield”

By Travis Johnson, Stock Gumshoe, April 22, 2009

I intended to work some more on Peter Schiff’s picks today, but the level of interest in that piece yesterday was, well, underwhelming — so I’ll work on something else for a bit and come back to our friend Mr. Schiff a bit later.

Today I wanted to take a look at an ad that’s touting the “rarest security on earth” — only eight of these investments exist, according to the folks at High-Yield Investing, and they’re touting some of them and teasing others. There are two that I know she’s been teasing over the past several months, with one of them more or less unchanged and the other up smartly since the last time I wrote about them … but she teases several others, so let’s find out what they all are.

These “rarest securities on earth” are usually called either Income Deposit Securities or Enhanced Income Securities, and they are essentially a hybrid investment that’s made of of half bond, half stock (sometimes the proportions don’t start out at quite 50/50). In buying one of these you’d get one share of the common stock of the company (sometimes the companies have stock that trades separately from these hybrid securities, sometimes they don’t), and a set amount of principal for a bond that has a regular and unchanging coupon payment.

These are designed for income, so the stock portion generally pays a good dividend that can rise or fall based on underlying earnings, and the bond portion pays a steady coupon yield to provide stability and, since bonds are senior to equity, you also get a bit of a lien on the company in the event of something really yucky like a bankruptcy.

This is the table of securities that Pasternak teases for her newsletter as a “good place to start” — though of course, it would be a better place to start if she actually gave you the names and tickers of these mysterious rare securities.

This is the info we get:

Power-generation corp. 15.1%
Packaged-foods maker 14.4%
Hospital owner 15.3%
Bus manufacturer 14.4%
Telecom company 19.0%
Recycling-plant provider 29.1%
Transportation company 13.8%
AVERAGE: 17.2%

Those percentages are the yields for each security — not bad, eh?

So I noted that we’ve looked at a couple of these before — they are the second and fourth ones on that list, the Packaged-foods maker is B&G Foods (BGF is the ticker for this particular security) — I wrote about B&G Foods and this whole concept of Enhanced Income Securities back in January. And the bus manufacturer is New Flyer Industries (NFI in Toronto, NFYIF on the pink sheets) — I wrote about New Flyer back in February. New Flyer has done pretty well in the last couple months, B&G was steady for a while, had a big dip, and now is right back close to where it was when I wrote about it early in the year — and yes, both have big yields in the teens, though the shares fluctuate signfiicantly and the dividends can change, so the actual yield might be a bit different than what’s listed in the table above.

But that still leaves us with five others — what might they be?

The Telecom company teased is almost certainly the only other US-listed security of this type, Otelco (OTT). This is a wireline telecom company that provides phone, data and TV service in five states (Massachusetts, Alabama, Maine, Missouri, and West Virginia). Their “rare security” is a bond of $7.50 principal amount with a 13% yield (pays .975/year) and a share of stock that currently pays a dividend of about .70 a year, so the total annual dividend is about $1.68, paid in quarterly installments of 42 cents.

OTT is not profitable, so the stock dividend will probably be treated as a return of capital, and the coupon interest from the bond would be treated as income — so keep that in mind if you’re comparing these to other high-yield stocks, the after-tax yield may be more important than the nominal yield if you’re investing in a taxable account. The debt portion matures in 2019, but can be called at a small premium in 2012 (the premium drops off over the next couple years) if the company decides that they can borrow cheaper and they’d like to pay you back.

Other than that? They’ve been very steady with their dividend, they carry a fair amount of debt (not unusual for a fixed-asset telecom company), and they’re teensy. For more, go forth and researchify on your own and let us know what you think — I’ve got a couple others to find for you.

The other securities, like New Flyer, are primarily listed in Canada but can also be bought on the pink sheets if you’re careful. Let’s figger out what they are …

Transportation company

This one is Student Transportation of America, a school bus operations outsourcer, more or less — their
Their shares, which they call Income Participation Securities (yet another name for the same thing), are listed at STB.UN in Toronto, and on the pink sheets at SUDRF. Each share of these income securities consists of one common share of Student Transportation (also listed in Canada, at SDB) and C$3.847 principal amount of 14 per cent subordinated notes.

This one has a monthly yield — not surprising, since back in 2005 when this structure looked like it might take off these were being sold to companies as a way to build something like a Canadian Royalty Trust, but with a more appropriate structure for non-Canadian companies or companies that do most of their business outside Canada. As of April the total payment was .09125 Canadian cents per unit (about half dividend/half interest payment), for a total current yield of about 14% if you assume the dividend holds steady.

Recycling-plant provider

This one must be Primary Energy Corp (PRI.UN in Toronto, PYGYF on the pink sheets). This is a cheapo one, the value of the Enhanced Income Security has dropped down to awfully close to the principal value of the bond portion — the company itself is quite small, and operates five power plants in Northern Indiana, mostly plants that recycle energy from industrial processes and excess heat (from steel plants, for example).

It looks like they might be in the process of being taken private by their subsidiary if I understand their press releases, so be careful with this one. They have been distributing substantially all of their cash to their unitholders to keep the income level up, they released their earnings yesterday. If they do stick around and stay in business as it currently stands, the annualized yield is getting awfully big at C80 cents a year, off of a C$2.81 share price that’s a yield of 28%, which should frighten you.

Power Generation

The power generator in this group would be Atlantic Power Corp (ATP.UN in Toronto, ATPWF on the pink sheets). They operate power plants around the U.S., and they seem to have been pretty successful at keeping their cash generation solid even as it looks like they have had to shelve some older or dirtier plants (like a coal plant in California), in part they’ve done this by getting regulatory approval for some rate increases, and in part by acquiring more plants. They say they can keep the current distribution at least through 2015 in their last earnings release — based on the latest monthly payment of .0912 cents (Canadian) and a C$8.54 share price, that’s a yield of just about 13% (about two thirds of the current payout is interest, one third is the stock dividend).

And finally, our Hospital owner.

This is Medical Facilities Corp., with the Income Participation Securities trading at DR.UN in Toronto and MFCSF on the pink sheets. Their latest earnings report is here. They own controlling interests in four specialty surgical hospitals in Oklahoma and South Dakota, and two ambulatory surgical centers in California. Like the others, they’re really a US company but are officially Canadian and are designed to spin off income like a royalty trust — their current montly distribution is .0917 Canadian cents, so from the current price of C$8.46 that gives an annualized yield of almost exactly 13%.

So … these wee orphans of the short-lived enhanced income security craze of the early 2000s all have a few things in common — they generate quite a bit of cash, they don’t need much cash to invest in current activities, they’re fairly stable businesses, and they’re designed to spin almost all of their cash flow through to unitholders for tax efficiency, not unlike a Canadian royalty trust, a REIT, or a Master Limited Partnership (though there are plenty of differences when you’re analyzing them or filing your taxes, they are similar in conception and goal).

Does this sound like something you’d like in your portfolio? The yields are good, I’m not quite sure what might happen to these companies when the bond portion of their capital structure matures, and they do carry a lot of debt — though you’d be collecting some of those debt interest payments, so perhaps that’s OK with you. I don’t know if they’ll be great performers, just that this is what Carla Pasternak continues to flog for her High Yield Investing newsletter. Let us know what you think with a comment below… and if you’ve got a favorite from this list (personally I like the idea of Atlantic Power, but haven’t looked at it too closely yet).

Oh, and if you’ve ever subscribed to that newsletter, please share your opinion — you can review it here, or see what other reviews might already be available.

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10 Comments on "“Rarest Security on Earth: Average 17.2% Yield”"

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Farmer John

I don’t trust anything Pasternack comes up with.
If you look at her track record, she has a long history of being totally being the curve on CHANGES in yield.
eg, she put a pig rec on Bank of Ireland, which at $4 was yielding something like 90%. BUT the bank had already canceled its dividend and the stock promptly fell to 66 cents.
There are other egs, some of which I still own, tomy continuing dismay.
Farmer John

V. Lee

Travis I have been following DR.UN and ATP.UN for a while and have been looking for an entry point. Do you know if these will be affected by the tax laws on trusts coming into effect in 2011


Mary Ann

I’ve owned ATP.UN since 2006 and enjoy the monthly payouts. Do some research on their website and you will begin to understand why it is a nice steady investment. They recently increased the dividend also. Supposedly they will NOT be affected by the 2011 tax changes, but do your own due diligence.

But calling this type of investment the Rarest Security on Earth is just plain stupid. It’s just insulting to any investor with any intelligence; but then again, I doubt that Pasternak is trying to market to anyone with any intelligence.

I picked up some Atlantic Power because it has been discussed by Roger Conrad at KCI. It may be a pick in Canadian Edge and is sometimes mentioned in the free E-letters from KCI. I have reservations about buying securities discussed in free commentaries, but the dividend from ATP is good for a little while. ATP is, as mentioned above by Travis, an American company dressed up to look like a Canadian. I like that it is only on the Toronto Exchange and is not denominated in USD’s. I bought my shares at one of the dips and keep a… Read more »

I like the idea of power generation and will take a look at ATP. As for me, I own Boralex unit trust (BPT_un.to or BLXJF) It pays near 22%. Their cash flow is from hydroelectic generation. Unless you think that canucks and downeasters are going to give up on their cheapest source of electricity it seems like a good bet going forward.

They haven’t changed their dividend since inception.

A.M. Deist

Primary energy required recapitalization. I would steer clear of this company. B&G and Student Transportation have separated their bonds from the stock, which gives a much lower yield. Best two are Atlantic Power and Medical Facilities which have good revenue and earnings growth. Were I to invest in any, my first choice would be Atlantic because utilities haven’t enjoyed the upswing in markets and should recover nicely when the global recession is over, but I wouldn’t buy any until after their Nov 11th conference call.

Travis — perhaps your original idea of drilling down into the picks of Peter Schiff(ty) would have been more timely, (the market likes gold right now). If nothing else, you have warned everyone that these “investments” are high risk. When we read that a company is “not profitable” but is paying out a yield of 13% on a bond and a dividend on a stock, we have to wonder about the motive in recommending such an “investment” by the newsletter. It appears that the concept Pasternak pushes is to buy a basket of high yield stocks, hoping that most of… Read more »

Both my huaband and i own B&G and OTT. we bought them in our IRA so taxes don’t matter. We have good appreciatiate in ott and the inclome form both has been good. we are happy with our investment