More High Income Trusts from Roger Conrad

More high-yield picks teased by Canadian Edge

By Travis Johnson, Stock Gumshoe, October 20, 2009

Yesterday I looked at Conrad’s latest teaser for his Canadian Edge newsletter, and I promised to follow up today — if you want the big picture and the broader look at trusts in general, start with yesterday’s article here, but if you’re ready to just look at a couple teasers and sniff out the companies with me, read on!

Here’s the next company we’re looking for:

“An energy company that does it all. Much of Canada’s economy is based on energy and natural resources, and many income trusts are in the business of oil and gas extraction. While these energy trusts have had their high-flying moments, most are in the doghouse these days; you won’t find me talking much about them in this letter. Diversified energy companies are a different story though.

“This trust has interests in gas extraction, pipelines, gathering and processing, energy services, even power generation including “green” wind power. With a three-year growth rate of 18%, there’s even the prospect of long-term capital appreciation. In the short term though, this company’s shares are one of the best bargains around – making the 16.94% dividend too tempting to pass up.”

This one pretty much has to be AltaGas Income Trust (ALA-UN in Toronto, ATGFF on the pink sheets), but the distribution yield has dropped a bit since Conrad first penned this teaser, it now stands at about 11%. I actually find this one very interesting, it’s similar in some ways to many of the US MLP midstream energy companies, with a fairly solid transportation, gathering, processing and transmission business, though they also are invested in windfarms and hydroelectric generation, and they bought 5% of the geothermal co. Magma Energy earlier this year. They are also planning to convert to a corporation in the second half of next year, which means that they can re-acquire their natural gas utility that they had to spin off when they converted into a trust, so it will also have that steady utility business to add to the portfolio starting probably next year sometime.

The current yield on this one is a little over 11%, quite a bit nicer than most of the MLPs that are fairly similar in the US — it’s certainly possible that the distribution will shrink when they convert to a corporation, but they’ll still have a nice steady cash flow business and should be able to pay a substantial dividend. They have, for whatever it’s worth, been steadily raising the dividend each year for the past couple years.

Next?

“Growth + income in a sheltered oil & gas sector. When you drill for oil and gas, you have your ups and your downs. But regardless of market price, producers rarely turn off the spigots. It’s too costly. No, they keep pumping the stuff to the refineries and downstream markets, through … pipes.

“Say hello to the pipeline industry – the stable, fluctuation-resistant end of the energy biz. Back last June when oil prices were sky-high, this trust’s shares were up near US $19. Now the price has been beaten back down to around US $12 by investors who don’t necessarily understand the fine points of energy economics.

“That offers you a growth + income opportunity with great safety. This trust reports record growth and income in every recent year, with a growth rate around 35%. You just sit back and collect that (yes, monthly) 12.08% distribution check while you wait for share prices to start rising again.”

That’s not a ton of specific clues, but from what we get I’d wager that this is Pembina Pipeline Income Trust (PIF-UN in Toronto, PMBIF on the pink sheets). The price did hit about US$19 at the highs in the Summer of 2008, and like the others it’s a bit higher priced now than when Roger threw this teaser together — it’s just under US$15 now, with a yield of almost exactly 10%. For US investors I’m not sure that I’d focus on Pembina over any of the solid US MLPs unless you’re specifically trying to get into the Canadian dollar — not that there’s anything wrong with Pembina, but I don’t know that their structure or business is particularly unique compared with US MLPs that give you some nice tax advantages.

They do have a pretty broad presence across the main oil and gas region in Western Canada, with a pipeline network spanning BC and Alberta and serving conventional crude oil and nat gas installations, and it appears that their planned growth is largely from serving the oil sands in Alberta (so that’s likely to give them some price sensitivity if oil really drops again and folks take oil sands projects offline), and from growing their midstream and processing businesses. Interesting company, and I’d agree at a quick glance that it’s probably quite safe and steady, but I don’t see a lot that would cause me to pick Pembina, with the uncertainty over what their distribution might be following the tax changes, over someone like Kinder Morgan or Enterprise Products Partners in the US. That said, it’s possible that they’ve announced promising plans for their post-2011 income-producing potential, I haven’t looked at all of their investor presentations and announcements.

That’s about enough sleuthifying for one day, we’ve also got a food distributor and a construction company teased — if you’re interested, I’ll try to get to those in a future writeup. Enjoy the rest of your day!

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