“Up To 16% Yields … From Steady, Cash-Rich Companies” — Roger Conrad

Solutions to Canadian Edge teasers

By Travis Johnson, Stock Gumshoe, October 19, 2009

Many of you have heard of Roger Conrad, he runs a few newsletters that are largely focused on income, including Utility Forecaster and Canadian Edge, both of which have been ranked pretty highly by my readers (you can see their reviews here) — this tease of his is for Canadian Edge, a newsletter that focuses on Canadian income trusts/royalty trusts/business trusts, so it won’t surprise you to hear that the companies teased are all of that flavor.

But he does pick a few interesting ones — not just oil and gas, which are the mainstays of the trust world, but some others, too … so let’s see what they are, shall we?

First, a bit of his pitch:

“Who couldn’t use an extra paycheck every month?

“If you’re closing in on retirement or just want to grow your nest egg really fast, stashing it under the mattress is not an option.

“Fortunately, you do have another option: You can get up to 16% yields right now from steady, cash-rich businesses.

“Stable, solid businesses that pay you monthly. Like a paycheck.

“I’m talking about safe, dependable, Canadian trusts — probably the best income generator on the planet. And the best news is this: right now, you can snap up these rock-solid businesses at bargain rates.”

OK, so I’ll be the one to stand up and say it first … yes, I could use an extra paycheck every month. And I promise not to blow it all on comic books and chewing gum. So how do I get it?

“You get near-perfect safety and up to 16% dividends. With all the talk about shrinking dividends, you should know that we have 18 (out of 19) holdings with dividends that have never been cut.”

That one of the 19 that has been cut? That’s the one I wrote about for a similar teaser back in January, for the Yellow Pages Income Fund — if you’ve seen the teaser, that’s the “Google partner” that has a 15% yield. It’s down a bit from the price it was teased at in January, in part because they cut the dividend, but it does currently have a yield of about 14.3%. You can see my original comments about it here if you’re interested, I still think it’s a dying business like Idearc and R.H. Donnelly and will probably go in much the same direction, stock-wise, but they are in better fiscal shape and you might just wring a few more years of decent dividends out of them first, I don’t know.

But Conrad teases a handful of trusts right now, so let’s have a look for some more new ones. First, if you don’t know what these trusts are, I’ll let him explain it in his own words:

“Canadian income trusts are pass-through entities. That is, they pass almost all their profits through to you, the shareholder, in the form of dividends. In that sense they resemble U.S. real estate investment trusts (REITs) — except that the Canadian trusts must pass through a greater percentage of profits to shareholders than U.S. REITs are required to do — up to 85%.

“The trusts were created by law, initially to benefit oil and gas industries, a backbone of the Canadian economy.

“Canada figured its oil and gas producers needed a way to compete with the Exxons of the world for investor dollars. So, eye-popping dividends might be just what the doctor ordered.

“But they proved such runaway successes that other Canadian industries also reorganized as trusts.

“There are now over 200 Canadian income trusts — in everything from Alberta oil-sands extraction, to hydro and wind power, to online search engines, to movie theaters and healthcare and restaurant chains, and more. Out of the 200+, about 150 are suitable for U.S. investors — and I cover all of them in my service, Canadian Edge.

“Out of those 150 trusts, a select 34 qualify for my seal of approval – awarded only to those trusts that pass exacting tests for safety, stability, sound management, dividend maintenance and growth potential.”

And though many folks are concerned about trusts after the tax laws were changed a couple years ago, effectively forcing these pass-through entities to turn into taxed corporations starting in 2011, Roger Conrad doesn’t appear to share their concern:

“For example, is there a risk share prices will tank if a Canadian income trust converts to a corporation? (The short answer is: Share prices are at least as likely to rise….”

OK, so let’s find out about a few of these, shall we?

“One of my top choices is said to have an odd mix of assets, but it’s supremely profitable. Its principal business is infrastructure — power infrastructure and “social” infrastruture. If there’s another company anywhere on Planet Earth that produces power from gas, wind, hydro and biomass — and has a huge stake in long-term care for elders — I don’t know its name.

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“16% with near-perfect safety

“But what a cash cow! It gives investors 16% yields, and, nice touch, it pays dividends once a month.

“Best of all for you, you can buy it now well below my entry point recommendation. The trust intends to convert to a dividend-paying corporation in less than a year with no cut in dividends — so, it’s the same great company selling now at a great price with heaps of appreciation, to boot. Because if history is a guide, the share price of this trust will rise and rise after it converts.”

Well, the share price of the trust might rise after it converts, but the dividend will be falling substantially starting sometime in 2010 — this is the Macquarie Power and Infrastructure Trust (MPT-UN in Toronto, MCQPF on the pink sheets).

This trust is managed, as are many infrastructure trusts around the world, by the Macquarie Group of Australia. And they did indeed announce that they will be converting to a trust before the deadline of January 1, 2011 (though perhaps just five minutes before the deadline), but as part of that conversion they’re going to adopt a sustainable dividend distribution policy. They’re currently (as in, for the rest of 2009), paying dividends at about a 16% rate (C$1.05 on a C$6.50 share price), but they are cutting the dividend after this calendar year to 66 cents a year, so the yield going forward will be about 10% at this price. That will represent a payout ratio of about 70-75%, and they expect it to be sustainable (the current distribution exceeds their distributable cash, but they promised to keep it steady for 2009 so they’re doing so). I had a bad experience investing in a different infrastructure fund from Macquarie, Macquarie Infrastructure Company (MIC), but that was a very different portfolio of toll roads and such, this one is certainly a bit more stable with a wide variety of power generation assets.

The “elder care” portion of their portfolio is a 45% stake in Leisureworld, which operates 50+ long-term care, retirement, and independent living homes in Ontario, Canada, it seems to have good occupancy and I’m sure there’s steady demand for their services as there is in the US, so one would imagine that it’s probably a fairly predictable and profitable business — if one that’s a bit of a stretch to call an “infrastructure” asset on par with their hydroelectric, wind, biomass and gas co-generation power plants. Basic info on the trust is available from the horse’s mouth here.

One more before we adjourn for the day? (There are a couple others, too — don’t worry, I’ll get to them tomorrow, something tasty to look forward to).

“The telecom that communicates $$$. 11.02% with near-perfect safety. This communications conglomerate has consolidated a number of smaller telecoms into one of Canada’s largest corporate entities. With a market cap of more than CD $10 billion and a three-year growth rate exceeding 18%, it’s both a growth and an income play. It pays investors handsomely – 12.35% – and, let it be noted, monthly.”

I’ll assume that the two different dividend yield numbers in that tease are the result of a less-than-careful editorial update, because this telecom’s price has been climbing in recent months and the dividend yield now stands at about 10.5% — this is Bell Aliant (BA-UN in Toronto, BLIAF on the pink sheets), which is effectively a roll-up of a lot of small regional wireline telecom companies. Not unlike what happened in the US, Bell was broken up into too many small pieces, and then lots of those pieces re-merged back together over the years. Frankly, I don’t know it well but in this space a 10% yield is not remarkable — it’s possible that Bell Aliant has better long term growth prospects, but on the surface, looking at this as simply a wireline telecom company that offers primarily local voice, internet and television, it’s not too different from US players like Frontier (FTR), a US wireline telecom that yields substantially more (near 14%) or Qwest (Q), which yields about 9%, with a small taste of Time Warner Cable or Comcast thrown in.

That’s not necessarily fair, I’ve done only the most cursory examination of Bell Aliant’s business and focused largely on the fact that they’re a rollup of regional wireline firms — they do offer high quality broadband and wireless services, too, and some cable TV particularly in Quebec, though they don’t seem to have the market dominance or huge size that would allow a comparison to AT&T or Verizon, or, for that matter, BCE, parent of Bell Canada (all of which, incidentally, also have great utility-like businesses and yields of above 6% — I own Verizon shares and call options, for full disclosure).

It looks as though Aliant is still controlled by good ‘ol Bell Canada/BCE, with a 45% stake, but that the older wireline and regional networks were shunted off to this income fund while the Bell “parent” under BCE has fun with the whiz-bang satellite, wireless, and urban stuff. Those older wireline networks that form the foundation of a lot of the regional telecom companies that still exist aren’t as sexy as the mobile or fiber-optic-to-the-home networks, and they’re not necessarily growing, but they do generate a substantial cash yield even as their customer numbers slowly dwindle, so it does seem to make sense to have them in an income trust structure — not sure how, if at all, conversion to a taxable entity will impact Bell Aliant, but it could well cut into the size of the dividend.

If any among you, particularly my fabulous cadre of Canadian readers, wish to explain this Bell/Bell Aliant business, fell free to do so — there’s a relatively brief explanation at Wikipedia that’s pretty clear and useful, but one never knows if the Wiki gang is sharing the real story. To me, the comparison to Frontier, which itself was a rollup of many small local phone companies and essentially bought or inherited lots of regional wireline phone customers from Verizon, rings true, at least on the surface — the big parent wants growth, the regional wireline owner wants a predictable business without much capital required, and a nice yield to spin off to shareholders.

So there’s your short list for the day — an infrastructure and “social infrastructure” fund, and a regional Canadian telecom, both with nice double digit yields. Likey? No likey? Let us know with a comment below — and Conrad’s Canadian Edge is among the top-ten newsletters ranked by Stock Gumshoe readers, so please click here if you’d like to share your thoughts about the letter and whether it ought to be moving up or down that list. Thanks!