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Advice: Income Investing
Trust the Income
by Roger Conrad
Published on September 16, 2009
On Halloween 2006, Canadian Finance Minister Jim Flaherty reversed a Conservative Party promise not to tax income trusts. Since then, many investors have treated the taxation date of January 1, 2011, as an effective doomsday. They’re in for a surprise.
Barring an increasingly unlikely last-minute change in the law, trusts will convert to corporations by 2011. What dividend they’ll pay after that, however, is entirely management’s decision. And a growing number—including eight that have already converted—will absorb the new taxes without cutting dividends.
Since October 31, 2006, trusts have priced in dividend cuts of 30% and worse. As a result, no-cut conversions thus far have generated immediate windfall gains of 30% and more, and there’s a lot more to come.
Yielding 12%, Atlantic Power (TSX: ATP-U, OTC: ATPWF) is organized as an income participating security (IPS) and has no 2011 taxation issues. In 2016, the bond portion of the IPS matures at par value of C$5.767 ($5.25). That leaves a pure equity yielding about 15% at current prices. Atlantic could pay off the debt entirely or, the more likely outcome, realign its debt into US dollars to match its entirely US portfolio.
Meanwhile, the second-quarter payout ratio of 68% demonstrates a secure cash stream that’s ensured against commodity, economic, currency, and interest-rate risk. Management continues to maximize shareholder value, inking a deal to sell for cash its 50% stake in a Georgia plant that won’t contribute to income for several years. Buy Atlantic Power up to $10. [The OTC-traded ADR closed at $8.47Tuesday—Editor.]
Pembina Pipeline Income Fund’s (TSX: PIF-U, OTC: PMBIF) management states its current asset mix will support its dividend for at least five years after converting to a corporation. Second-quarter revenue surged 12%, and operating income ticked up 10%, pushing up distributable cash flow per share 13.9%. Standard & Poor’shas affirmed the BBB+ credit rating, citing the continued low-risk expansion of fee-based energy infrastructure assets.
The latest of these are the purchase of the Cutbank processing complex from Talisman Energy (TSX: TLM, NYSE: TLM) and the construction of the Mitsue and Nipisi oil sands projects, which will start adding to cash flow next year. Buy Pembina Pipeline Income Fund up to $16. [The OTC-traded ADR closed at $14.22 Tuesday—Editor.]
Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) has indicated it may trim its 11% yield when it converts to a corporation. But it continues to up-sell customers to broadband service and cut costs at a faster rate than it’s losing basic phone business. Distributable cash flow covered the payout by a comfortable 1.13-to-1 margin in the second quarter. A major government-backed broadband effort in Atlantic Canada promises to further boost cash flow. Buy Bell Aliant Regional Communications Income Fund up to $28. [The OTC-traded ADR closed at $24.96 Tuesday—Editor.] |
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Roger S. Conrad is editor of Utility Forecaster, the nation’s leading advisory on essential services stocks, bonds and preferred stocks. His proprietary safety rating system evaluates the prospects of every significant electric, natural gas, telecommunications and water company, including utility-based mutual funds and foreign utilities. Roger’s penchant for detailed research and his studied insights into utilities markets have garnered him a wide audience of subscribers—not to mention a bevy of industry awards for his perceptive reporting, commentary and investment advice.
He brings the same enthusiasm and intelligence to Roger Conrad’s Canadian Edge, an Internet-based publication devoted to uncovering lucrative investment opportunities in Canadian royalty trusts. Roger is also associate editor of Personal Finance.
He holds a bachelor’s degree from Emory University and a master’s degree in international management from the American Graduate School of International Management (Thunderbird). In addition, he is the author of Power Hungry: Strategic Investing in Telecommunications, Utilities and Other Essential Services and coauthor of The Agile Investor and Market Timing for the Nineties with Stephen Leeb. |
