Best and Worst of Times
Five more oil and gas producer trusts boosted dividends at double-digit rates last month. For ARC Energy Trust (TSX: AET.UN, OTC: AETUF), that makes a total of 40 percent in two months, extraordinary for a trust run for long-term sustainability and stability.
Rising dividends go hand in hand with the rough doubling in oil and gas prices over the past year. And trusts are benefiting even more by using their cash windfall to slash debt and boost capital spending, both to develop properties and make acquisitions.
The good fortunes of the energy patch extend to other resource businesses as well. We sold metallurgical coal producer Fording Canadian Coal (NYSE: FDG, TSX: FDG.UN) when it became a momentum stock. But the resource producers highlighted in the May Feature Article, Building Growth, are also doing well. That includes Labrador Iron Ore (TSX: LIF.UN, OTC: LBRYF), which tripled its payout last month when its operator Rio Tinto secured a 90 percent gain in global iron ore prices.
Overall, Canada’s economic growth is flat this year. But as this month’s Canadian Currents makes clear, that has a far different connotation than it would in the US. The country is still running at close to full employment. There’s no mortgage crisis sinking the financial system, and the consumer sector and property markets are still generally healthy. (See the June Feature Article, Real Values). Rather, slower growth means less inflation pressure and more room for growth later on.
Unfortunately, it’s definitely the worst of times for some sectors of the Canadian economy. On a family trip to Quebec last month, I noticed very few US license plates. That observation gibes with the numbers showing weaker US tourism in the face of a slowing US economy, surging energy prices and rising Canadian dollar exchange rate in recent years.
Those three factors are the greatest danger to the fortunes of Canadian trusts and corporations as we move into the second half of 2008, within and without the hospitality sector. The ability of management to navigate them will determine how safe dividends are and where share prices go for the rest of the year.
Unless US weakness winds up spreading to China, the energy patch should stay in good shape. In addition, the long-run bullish picture appears very much intact, as growing conservation, emerging alternatives and developing new supplies still look years away from swinging the balance of energy market power back to consumer nations.
On the other hand, this is no time for complacency, even in energy stocks. Parabolic bull markets have a way of backing off when investors least expect it. I intend to hold most of our trusts through any potential pullback. But there’s nothing wrong with taking some of your profits off the table in a particularly hot sector, even in your most-favored trusts.
As for the rest of the Canadian market, it’s important to remember that investor perception isn’t always reality. There’s nothing like a falling stock to heighten the level of fear, for example, and accelerate selling even more and drive a share price still lower.
There are times when selling is justified, mainly when the underlying business starts collapsing. If that’s not happening, however, even the most vicious downturns for trusts and stocks will be temporary. Second quarter numbers will be solid, as will third and fourth quarter tallies. Distributions will hold and, in many cases, be increased. Share prices will bounce back, and those driven to push the sell button will find themselves whipsawed out of good positions.
The key is how underlying businesses are measuring up to the three great challenges to their bottom lines in mid-2008: the weakening US economy, rising energy prices and strengthening Canadian dollar.
Those that can control the danger will hold up, no matter how badly their shares get pounded by the fearful today. We want to hang in there and even buy in some cases. Those that can’t—either by fault of their own actions or by forces beyond their control—will flounder. No matter how big our prior losses or gains may be in these trusts, we want to sell.
Sorting the risks and potential rewards of the individual Canadian trusts and corporations is my chief task at Canadian Edge. There are some changed positions in the issue you’re reading now. But, for the most part, I’m staying the course amidst the market turmoil.
With the books now closed on the second quarter of 2008, the next big test is the upcoming results announcements. These will begin to flow later this month, and all should be in by mid-August. The details and related analysis will appear in the weekly Maple Leaf Memo, as well as flash alerts in coming weeks.
Portfolio Action
There are no changes to the Canadian Edge Portfolio this month. I’ve made two adjustments, however, to reflect changing market conditions.
First, I’ve moved buy targets higher for some energy patch trusts to reflect rising distributions. Second, I’ve cut to hold the trust most sensitive to volatility in the financial system, GMP Capital Trust (TSX: GMP.UN, OTC: GMCPF). This is still a premier franchise, but there could be more downside in the near term. I also continue to advise taking some profit off the table from the surging oil and gas trusts, as well as rebalancing portfolios among all Canadian trust sectors.
High Yields of the Month
Both July High Yield of the Month entries have been laggards in recent months. More important, however, both remain solid franchises, creating a solid buying opportunity now for anyone light in them. Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF) has been hit by overblown concerns about its exposure to rising natural gas prices and credit conditions, as well as misunderstanding about the possible November 2009 redemption of the bond portion of its income participating security. Provident Energy Trust (NYSE: PVX, TSX: PVE.UN) has performed well this year (up 24 percent) but has lagged recently on worries about the sale of its stake in the BreitBurn Partnership.
How They Rate
Here are advice changes. See How They Rate or the Portfolio tables for changes in buy targets. Price and yield information is updated every 15 minutes in both tables. Use this service as a reality check when errors occur with US quote-based services.
Note that column four of the table shows dividend frequency and the most likely way each trust will minimize 2011 taxation. “Foreign” indicates non-Canadian income, which isn’t taxed. “Pools” indicate tax pools used primarily by energy producers, which shield income dollar for dollar. “Depreciation” indicates businesses with large, noncash expenses that can be used to shelter cash flow. “None” indicates no visible method of avoiding 2011 taxes, though some trusts have stated their intention to simply outgrow their future liability and maintain distributions.
As in the US, the power sector in Canada enjoys reliably rising demand year after year. Producers are challenged to manage fuel and debt costs, but most sell their output under long-term contracts at escalating prices that pass costs through. The result is historically steady distributions and share prices. Fearful investors have pushed down valuations in this sector to their lowest level in years, making now a great time to buy the best.
Canadian Currents
In stark contrast to the US, Canada’s economy grew solidly in April. CE Associate Editor David Dittman picks the numbers apart and shows where–and why–Canada still has the edge in North America.
Tips on Trusts
This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section.
Dividend Watch List—Nine trusts in the CE coverage universe raised dividends last month against only one cut: Essential Energy Services Trust (TSX: ESN.UN, OTC: EEYUF). The energy services trust’s move had been anticipated by the market for some time and was accompanied by an unexpected asset sale. Extendicare Trust and Jazz Airline Income Fund (TSX: JAZ.UN, OTC: JAARF) showed signs of weakening.
Bay Street Beat—How the Canadian analyst community views trusts, including some of our favorites.
The Telecom Story—Industry Canada’s wireless spectrum auction is underway, and several major players, including Non-Trust recommendation Shaw Communications (NYSE: SJR, TSX: SJR.B), have picked up a large chunk already. Here’s a look at the country’s telecom sector.
Speaking Engagements
“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.
Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.
I also have a special invitation for readers to join me and my colleagues Elliott, Gregg Early and Neil aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.
This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.
It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.
For more information, please call 800-832-2330.
More Information
The following is a regular repeat from prior issues.
Use our live quote feed on the How They Rate Table for US dollar prices of trusts intraday. For other information, go directly to a trust’s website by clicking on its name in the table. Clicking on the Toronto symbol (suffix “.UN”) will take you to the web site of our Canadian partner Toronto-based MPL Communications (133 Richmond St. West, Toronto M5H 3M8) http://www.adviceforinvestors.com/, which has price charts and access to press trust releases. For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on income and royalty trusts. The Web site http://www.sedar.com/ is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto Globe & Mail features the “Globe Investor” section with all the latest news on trusts. Dominion Bond Rating Service is the pre-eminent credit rater for trusts. The Bank of Canada Web site features a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.
Roger Conrad
Editor, Canadian Edge
Rising dividends go hand in hand with the rough doubling in oil and gas prices over the past year. And trusts are benefiting even more by using their cash windfall to slash debt and boost capital spending, both to develop properties and make acquisitions.
The good fortunes of the energy patch extend to other resource businesses as well. We sold metallurgical coal producer Fording Canadian Coal (NYSE: FDG, TSX: FDG.UN) when it became a momentum stock. But the resource producers highlighted in the May Feature Article, Building Growth, are also doing well. That includes Labrador Iron Ore (TSX: LIF.UN, OTC: LBRYF), which tripled its payout last month when its operator Rio Tinto secured a 90 percent gain in global iron ore prices.
Overall, Canada’s economic growth is flat this year. But as this month’s Canadian Currents makes clear, that has a far different connotation than it would in the US. The country is still running at close to full employment. There’s no mortgage crisis sinking the financial system, and the consumer sector and property markets are still generally healthy. (See the June Feature Article, Real Values). Rather, slower growth means less inflation pressure and more room for growth later on.
Unfortunately, it’s definitely the worst of times for some sectors of the Canadian economy. On a family trip to Quebec last month, I noticed very few US license plates. That observation gibes with the numbers showing weaker US tourism in the face of a slowing US economy, surging energy prices and rising Canadian dollar exchange rate in recent years.
Those three factors are the greatest danger to the fortunes of Canadian trusts and corporations as we move into the second half of 2008, within and without the hospitality sector. The ability of management to navigate them will determine how safe dividends are and where share prices go for the rest of the year.
Unless US weakness winds up spreading to China, the energy patch should stay in good shape. In addition, the long-run bullish picture appears very much intact, as growing conservation, emerging alternatives and developing new supplies still look years away from swinging the balance of energy market power back to consumer nations.
On the other hand, this is no time for complacency, even in energy stocks. Parabolic bull markets have a way of backing off when investors least expect it. I intend to hold most of our trusts through any potential pullback. But there’s nothing wrong with taking some of your profits off the table in a particularly hot sector, even in your most-favored trusts.
As for the rest of the Canadian market, it’s important to remember that investor perception isn’t always reality. There’s nothing like a falling stock to heighten the level of fear, for example, and accelerate selling even more and drive a share price still lower.
There are times when selling is justified, mainly when the underlying business starts collapsing. If that’s not happening, however, even the most vicious downturns for trusts and stocks will be temporary. Second quarter numbers will be solid, as will third and fourth quarter tallies. Distributions will hold and, in many cases, be increased. Share prices will bounce back, and those driven to push the sell button will find themselves whipsawed out of good positions.
The key is how underlying businesses are measuring up to the three great challenges to their bottom lines in mid-2008: the weakening US economy, rising energy prices and strengthening Canadian dollar.
Those that can control the danger will hold up, no matter how badly their shares get pounded by the fearful today. We want to hang in there and even buy in some cases. Those that can’t—either by fault of their own actions or by forces beyond their control—will flounder. No matter how big our prior losses or gains may be in these trusts, we want to sell.
Sorting the risks and potential rewards of the individual Canadian trusts and corporations is my chief task at Canadian Edge. There are some changed positions in the issue you’re reading now. But, for the most part, I’m staying the course amidst the market turmoil.
With the books now closed on the second quarter of 2008, the next big test is the upcoming results announcements. These will begin to flow later this month, and all should be in by mid-August. The details and related analysis will appear in the weekly Maple Leaf Memo, as well as flash alerts in coming weeks.
Portfolio Action
There are no changes to the Canadian Edge Portfolio this month. I’ve made two adjustments, however, to reflect changing market conditions.
First, I’ve moved buy targets higher for some energy patch trusts to reflect rising distributions. Second, I’ve cut to hold the trust most sensitive to volatility in the financial system, GMP Capital Trust (TSX: GMP.UN, OTC: GMCPF). This is still a premier franchise, but there could be more downside in the near term. I also continue to advise taking some profit off the table from the surging oil and gas trusts, as well as rebalancing portfolios among all Canadian trust sectors.
High Yields of the Month
Both July High Yield of the Month entries have been laggards in recent months. More important, however, both remain solid franchises, creating a solid buying opportunity now for anyone light in them. Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF) has been hit by overblown concerns about its exposure to rising natural gas prices and credit conditions, as well as misunderstanding about the possible November 2009 redemption of the bond portion of its income participating security. Provident Energy Trust (NYSE: PVX, TSX: PVE.UN) has performed well this year (up 24 percent) but has lagged recently on worries about the sale of its stake in the BreitBurn Partnership.
How They Rate
Here are advice changes. See How They Rate or the Portfolio tables for changes in buy targets. Price and yield information is updated every 15 minutes in both tables. Use this service as a reality check when errors occur with US quote-based services.
Note that column four of the table shows dividend frequency and the most likely way each trust will minimize 2011 taxation. “Foreign” indicates non-Canadian income, which isn’t taxed. “Pools” indicate tax pools used primarily by energy producers, which shield income dollar for dollar. “Depreciation” indicates businesses with large, noncash expenses that can be used to shelter cash flow. “None” indicates no visible method of avoiding 2011 taxes, though some trusts have stated their intention to simply outgrow their future liability and maintain distributions.
- Boardwalk REIT (TSX: BEI.UN, OTC: BOWFF)—Hold to buy @35. This apartment REIT still hasn’t fallen enough to warrant a buy. But it’s growing rapidly and is the cheapest it’s been in some time.
- Bonavista Energy Trust (TSX: BNP.UN, OTC: BNPUF)—Buy @32 to hold. This trust is in the pink of health, but it’s run. Let’s wait on second quarter results before buying more.
- Canadian Oil Sands Trust (TSX: COS.UN, OTC: COSWF)—Buy @45 to hold. The market’s favorite oil sands play is making a lot of money but has run enough to expect at least a mild pullback.
- Cathedral Energy Services (TSX: CET.UN, OTC: CEUNF)—Hold to buy @16. The energy services market is heating up, and unlike the producers, these trusts and companies haven’t run.
- Extendicare Trust (TSX: EXE.UN, OTC: EXMUF)—Hold to sell. The sale of CAD126.6 million new shares took the analysts covering this REIT by surprise, and cash flow pressure is high.
- GMP Capital Trust (TSX: GMP.UN, OTC: GMCPF)—Buy @20 to hold. This trust is still the premier financial house in Canada. I’m not selling now. But conditions are tough, and there could be more downside.
- Jazz Airline Income Fund (TSX: JAZ.UN, OTC: JAARF)—Buy @8 to hold. The trust is insulated from rising fuel prices by its arrangement with Air Canada, but conditions in the airline industry are worsening.
- Pengrowth Energy Trust (NYSE: PGH, TSX: PGF.UN)—Hold to sell. Business has to be good for this trust, but costs and debt are still very high, as is the payout ratio. Why own it when there are so many others without its weaknesses?
- Sleep Country Canada Income Fund (TSX: Z.UN, OTC: SLPCF)—Buy @18 to hold. The weakening US economy and US dollar are building pressures for what’s been a strongly growing trust until now.
- Somerset Entertainment Income (TSX: SOM.UN, OTC: SOEIF)—Sell to hold. Intrepid Capital has bought another 4.8 percent stake in this troubled trust, bringing its total interest to 19.06 percent. That’s enough reason to stick for now.
- TimberWest Forest Corp (TSX: TWF.UN, OTC: TWTUF)—Sell to hold. The trust may be facing a dividend cut, but it’s worth more than its trading price for real estate holdings alone.
- Tree Island Wire Income Fund (TSX: TIL.UN, OTC: TWIRF)—Sell to hold. A dividend cut is still likely, but management is making progress dealing with exposure to US weakness and rising commodity prices.
As in the US, the power sector in Canada enjoys reliably rising demand year after year. Producers are challenged to manage fuel and debt costs, but most sell their output under long-term contracts at escalating prices that pass costs through. The result is historically steady distributions and share prices. Fearful investors have pushed down valuations in this sector to their lowest level in years, making now a great time to buy the best.
Canadian Currents
In stark contrast to the US, Canada’s economy grew solidly in April. CE Associate Editor David Dittman picks the numbers apart and shows where–and why–Canada still has the edge in North America.
Tips on Trusts
This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section.
Dividend Watch List—Nine trusts in the CE coverage universe raised dividends last month against only one cut: Essential Energy Services Trust (TSX: ESN.UN, OTC: EEYUF). The energy services trust’s move had been anticipated by the market for some time and was accompanied by an unexpected asset sale. Extendicare Trust and Jazz Airline Income Fund (TSX: JAZ.UN, OTC: JAARF) showed signs of weakening.
Bay Street Beat—How the Canadian analyst community views trusts, including some of our favorites.
The Telecom Story—Industry Canada’s wireless spectrum auction is underway, and several major players, including Non-Trust recommendation Shaw Communications (NYSE: SJR, TSX: SJR.B), have picked up a large chunk already. Here’s a look at the country’s telecom sector.
Speaking Engagements
“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.
The natural setting is, however, among the most exciting in the US. Venture west for the San Francisco Money Show Aug. 7-10, 2008, and conduct your own field study.
Neil George, Elliott Gue and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.
I also have a special invitation for readers to join me and my colleagues Elliott, Gregg Early and Neil aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.
This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.
It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.
For more information, please call 800-832-2330.
More Information
The following is a regular repeat from prior issues.
Use our live quote feed on the How They Rate Table for US dollar prices of trusts intraday. For other information, go directly to a trust’s website by clicking on its name in the table. Clicking on the Toronto symbol (suffix “.UN”) will take you to the web site of our Canadian partner Toronto-based MPL Communications (133 Richmond St. West, Toronto M5H 3M8) http://www.adviceforinvestors.com/, which has price charts and access to press trust releases. For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on income and royalty trusts. The Web site http://www.sedar.com/ is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto Globe & Mail features the “Globe Investor” section with all the latest news on trusts. Dominion Bond Rating Service is the pre-eminent credit rater for trusts. The Bank of Canada Web site features a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.
Roger Conrad
Editor, Canadian Edge
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