“The Best of Both Worlds . . . High Yields with Low Risk”

By Travis Johnson, Stock Gumshoe, February 25, 2009

Who can resist a headline like that? High yields, low risk … that’s pretty much the holy grail for investors these days (well, except for those who haven’t yet given up on finding the next Google, or the next Seabridge Gold).

So what is this all about? Today I’m working with just a wee snippet from a Carla Pasternak teaser ad for her High-Yield Investing newsletter.

This is a follow-up on an ad that I wrote about back in mid-January, about Enhanced Income Securities (EIS) — at the time, she was talking about her favorite EIS, which is pretty much the only one that’s listed in the US (click here for that article if you want to catch up with the rest of the class).

Enhanced Income Securities, which is the term she apparently made up, are more commonly referred to as Income Deposit Securities … but there are several different names people have made up for these oddball securities, so that doesn’t really matter.

These ads from Pasternak have been around for a while, in dfferent forms, but this kind of market is really made for this kind of teaser ad — they promise secure yields, the partial principal protection of a bond, and the participation in possible growth of a stock. And it’s more or less true, which always helps. She was on board with these investments pretty much as soon as they started to go public in the US and recommended them at least as long ago as the Fall of 2006, and the language of her ads hasn’t changed all that dramatically since.

The securities themselves, of course, never really caught on in the US — they’ve been much more successful in Canada, where they seem to have been born, and where their similarity to the Canadian Trusts, at least in terms of monthly dividends, has perhaps helped them to seem less odd.

There is really only one US IDS left, the one that Pasternak has consistently written about in her ads for a few years now, B&G Foods (BGF). It’s priced at about $8.25 at the moment, it was consistently in the mid-teens for its first few years of existence, then ran up to near $25 in 2007 and back down again in 2008, until collapsing (like everything else, to be fair) in the second half of last year. That’s the one I wrote about in January, and you can see that writeup here if you like.

But I didn’t talk about any of the Canadian versions of these, which can also be easily owned and traded by most US investors, on the pink sheets or directly in Toronto. And as I looked at her most recent ads she included a brief teaser sentence about another of her favorites:

“I’m also bullish on a stable, well-entrenched bus manufacturer with dividends of 11.3%.”

That’s it, that’s the teaser. But thankfully, the Gumshoe and his mighty Thinkolator are on your side … this one is:

New Flyer Industries (NFI.UN in Toronto, NFYIF on the pink sheets — volume on the pinks is quite low, be careful)

This is an income trust security, or whatever you want to call it — part bond, part stock. In this case, it represents one share of New Flyer and C$5.53 worth of principal on a bond that pays a coupon of 14%.

In practice, The monthly distribution for February is C$0.0975, which, if annualized, provides a higher yield now of about 14.25% on the current share price of C$8.20 (that’s $6.57 down here on the other side of the border). The higher yield is due to falling share price since she compiled the data for the ad, I assume, the actual monthly dividend payment has not changed for at least a year.

Here’s how they described it in their latest press release announcing the distribution:

“The total distribution of C$0.0975 per IDS reflects a cash dividend of C$0.03298 per common share and an interest payment of C$0.06452 per C$5.53 principal amount of subordinated notes for the period from February 1, 2009 to February 28, 2009.”

The company is indeed a manufacturer of heavy transit buses, they do their manufacturing both in the US and in Canada. They won’t be releasing their earnings until mid-March, but they did preannounce that they’ll be seeing lower earnings than might have been expected because of currency fluctuations — probably not that surprising, given the huge recovery of the US dollar against the Canadian currency during the last six months or so. If we can think back to very different times, it was only about 18 months ago, in the height of the commodities boom, that the Loonie reached parity with the US dollar, and it actually remained near parity for quite a while before the greenback pulled ahead last Summer — the Canadian dollar is now worth something like 80 US cents, though of course that could change as quickly as I’m typing. That has undoubtedly made it hard for companies working on both sides of the border to predict their earnings and hit their numbers.

Is this the kind of thing you’re interested in buying? Well, as of their last quarterly release (for the September quarter) they did have a big backlog of orders and options, which together represented over C$3 billion — which seems like quite a bit for a company that has been recently recording revenue of just under a billion dollars a year. At the time they saw orders going up particularly from US transit fleets, so I would assume that would continue to be a key.

I don’t know the firm well, but there are some big trends that will probably impact their business. Odds are quite good that a main driver of new bus purchases is fuel efficiency, so it’s quite possible that falling diesel prices will make transit agencies order new buses with less urgency — to some extent it probably depends on the cost savings that new buses represent.

At the same time, transit agencies, including my own public transportation here in Washington, DC, are announcing cutbacks and smaller government subsidies because of local government budget crises as income and property tax receipts collapse due to the broader economic malaise.

So where will things fall for a bus manufacturer? I don’t know — I would imagine that we’ll hear some more from the company next month when they report their earnings. All I can tell you is that this income security has been touted by Carla Pasternak for some time and she’s currently “bullish” on it … and that if the company doesn’t go bankrupt, the bond portion of that income return, which represents about 2/3 of the current dividend, ought to be relatively safe.

See, even I have to use those words that are scattered through every teaser letter … “imagine,” “if,” “ought to be.” I could throw in a “maybe” and a “probably” for you, but you get the idea.

If you’re a fan or foe of these hybrid stock/bond securities, feel free to chime in with a comment below. And if you’ve ever subscribed to High-Yield Investing, click here to review it for us and let everyone know what you think of Pasternak’s newsletter.

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February 25, 2009 11:25 am

OTT is another US IDS. The current yield is 19.77%.

Elissa Stein
Elissa Stein
February 25, 2009 11:50 am

Do you have to factor in the canadian income tax on your calculation for yield, like you would on a Canroy?

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March 1, 2009 9:12 am

From: Nick Guarino
Subject: Gold death plunge has started…

Who is this guy? Any credence?

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M. Kozak
M. Kozak
March 1, 2009 11:44 pm

New Flyer featured in the “Makers & Breakers” column of the latest issue of Forbes magazine.
“Buy New Flyer Industries (6.30, NFYIF.pk), a Winnipeg, Man. maker of buses for city transit systems, seems almost too good. The stock’s $0.93 (U.S.) annual dividend gives it a yield of 14.7%.
Dennis Mykytyn, at New York’s Modern Capital Management, has special insights into New Flyer’s business. Prior to becoming a hedge fund manager, he was a senior financial officer for the Metropolitan Transit Authority. “No one will buy untested buses,” say Mykytyn, recalling New York City’s disastrous 1980s experience after it purchased Grumman’s new line of Flxible buses, only to have their frames crack while traversing potholes.
By contrast, New Flyer has been making buses since 1930. Chicago’s Transit Authority, for example, recently rolled out 150 New Flyer hybrid electric buses. “In 2008 New Flyer won 64% of its tenders. They have an order backlog of $4.1 billion, up 44% from a year ago. Also, mass transit is favored by Obama’s stimulus plan,” said Mykytyn to a gathering of ValueForum.com members in February.
New Flyer’s shares (called “income deposit securities”) trade on the Toronto Exchange and on the Pink Sheets here. U.S. investors get hit with the 15% Canadian withholding tax but get that money back by claiming a foreign tax credit.”

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