Reliable, recession-resistant businesses pay yields you can count on. That’s the hallmark of both of this issue’s High Yields of the Month: Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) and CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF). I’m adding the pair to the Conservative Portfolio.

We first introduced Bird Construction several months ago in an article about Canada’s ongoing effort to revitalize its infrastructure. Those efforts have gained additional urgency in recent weeks, as the government has become increasingly concerned about the country’s economic slowdown.

As we pointed out in the Nov. 26 Maple Leaf Memo, Harper and provincial leaders held a meeting earlier in the month to address the issue of Canada’s deteriorating physical infrastructure, which is estimated to urgently need CAD125 billion to close its “deficit.” Meanwhile, a study on municipal infrastructure projects by Ottawa-based economics research firm Informetrica found that for each CAD1 billion in additional spending, 11,500 jobs would be added in the first year and Canada’s economy would expand by about 0.13 percent.

Unlike the US, Canada is still running a budget surplus, and its financial system is sound. Moreover, only CAD5.8 billion of the CAD8.8 billion of the Building Canada Fund (BCF) announced in the 2007 budget has so far been spent. The upshot: Despite the drop in energy prices in the past few months, Canada has more than enough funding available for a major infrastructure build and every reason to finance such an endeavor. In fact, the government has recently made statements to the effect that it will, even if it does have to go into temporary deficit.

Bird Construction has been a dominant player in building design and construction services for more than 85 years. Today, the company literally has its hands in every province, supporting projects for everything from oil sands mining to school construction.

That puts it in prime position to profit from any new spending out of Ottawa in coming months. But even if those dollars flow more slowly than expected, Bird’s already profiting richly from the ramping up of non-residential construction spending across Canada.

Third quarter revenue surged 31.5 percent, pushing nine-month growth to 48.3 percent as earnings per share more than doubled from 2007 levels. Meanwhile, order backlog–the best predictor of future growth–rose to better than CAD1.2 billion, up from CAD821 million a year ago and CAD969 million at the beginning of 2008. That’s about as clear a signal as you can get that Bird’s still finding plenty of orders even in a weak environment like this one.

This isn’t surprising at all given Bird’s history. As pointed out in MLM, the company has been consistently profitable for the last 20 years. It’s made money every year since 1988 and hasn’t had a quarterly loss since 1995, near the absolute bottom of the last commodity price cycle. Management has consistently applied a vigorous risk reduction approach, basically hedging all external exposures whenever possible. That includes getting pricing commitments from subcontractors before bidding on contracts and applying tough criteria before taking on clients.

Looking ahead, that kind of discipline should keep Bird profitable, even if the Canadian economy should slow more than expected. That’s because its blue chip client base, which includes governments as well as large corporations, will continue to pay its bills. And that will be true even if federal dollars don’t flow as expected.

The trust’s featured projects include a 4.69 million liter concrete dam and reservoir system and giant water treatment station in Manitoba, a massive expansion to an oil sands facility owned by the Syncrude venture of Super Oils, foundations for eight pre-engineered buildings on an Alberta hydrogen plant site for Air Products Canada, the 200,000 square foot facility housing the second-largest and most modern electric trolley fleet in North America for the Greater Vancouver Transit Authority, the 46,000 square foot Stiller Center for Biotechnology Commercialization and an enormous range of projects for commercial, residential and institutional customers.

The company is also a pioneer in “sustainable” design, with seven featured projects now underway, including water treatment, a flex-space student housing facility on the campus of the University of British Columbia, and a revolutionary new sports complex to be used in the 2010 Vancouver Olympics.

That adds up to a massive and very reliable river of cash flow for Bird and its investors. And the company’s CAD120 million net cash hoard is a powerful weapon for winning still more contracts, particularly once the Canadian government starts to ramp up its activity.

As is the case with dozens of other strong companies, Bird shares haven’t gotten much credit from investors over the past few months for business exploits. Despite an almost universally bullish consensus on Bay Street, the shares have fallen sharply and now yield around 10 percent.

Meanwhile, the payout ratio has sunk to just 22 percent, providing plenty of protection from today’s turmoil as well as 2011 taxation. That’s too good for us to pass up. Bird Construction Income Fund is a buy all the way up to USD20. 

Health care is always in demand, no matter what the economic climate. And as a dominant player in two key areas–laboratory testing and medical imaging–CML Healthcare’s position is far more secure than most.

Health care companies in the US face an uncertain future as the incoming Obama administration forms its agenda. In contrast, CML has operated profitably under Canada’s national health care system since it was established in 1971 as a single medical laboratory in Ontario.

The company has since completed 13 acquisitions of laboratory services businesses in Ontario, which has in turn handed it licenses for a broad range of permitted tests. The company now operates through 124 clinics providing services including hematology, biochemistry, cytology, microbiology, histology, holter monitoring, prostate specific antigen (PSA) and HPV testing.

The company entered the medical imaging services business in 2001 with the purchase of DC DiagnostiCare, immediately becoming the leading player in Canada for that business. And this year it took its medical imaging act south of the border, using the strength of the Canadian dollar to snap up American Radiology Services.

These services include MRI, CT scan, nuclear medicine, ultrasound, mammography, x-ray, flouroscopy and bone densitrometry. Its network includes 119 non-hospital based clinics in Canada, including 92 in Ontario, 16 in British Columbia, eight in Alberta, two in Manitoba and one in Quebec.

Third quarter 2008 numbers are further proof of the success of CML’s strategy. Revenue zoomed up 50.9 percent, spurring a 6.8 percent jump in cash flow and an 18.8 percent increase in distributable cash flow, taking the payout ratio down to 84.3 percent. That’s right in line with last year’s figure and points to considerable payout safety. Management continued to execute on acquisitions, with a focus on further consolidating the medical imaging systems business in Canada. And it managed to win a solid increase from the government for certain price caps on services.

Absorbing new facilities does come at a price. CML’s third quarter operating, general and administrative expenses rose to 71.5 percent of revenue from last year’s 59.7 percent. That was partly due to increased costs, but also to the fact that medical imaging margins from recent acquisitions are lower than those on laboratory testing services. Judging from the pattern of prior acquisitions, however, those numbers should improve going forward.

The other factor is a 37 percent year-over-year increase in interest expense, due to debt taken on to complete CML’s purchases. The trust has held outstanding units steady over the past 12 months, as it believes they’re undervalued. That’s an opinion shared by insiders buying this year, as well as universally bullish Bay Street.

Net debt-to-total capitalization, however, remains relatively modest at 32.6 percent at the end of the third quarter. That’s only slightly higher than the 31.6 percent at the beginning of the period, though somewhat above the 21.3 percent at the beginning of 2007, before the American Radiology purchase. Debt-to-cash flow climbed to 2.2, up from 1.7 at the beginning of the year.

The good news is CML, after refinancing a CAD190 million maturing senior note earlier in 2008, has no major debt maturities upcoming for several years. Also, management has a strong track record of generating cash flow and applying it to debt reduction, and banks continue to be willing lenders.

Dominion Bond Rating Service rates CML’s debt STA-2 (low), one of its very highest for any income trust. That rating was reaffirmed earlier this year following the American Radiology purchase, as well as several smaller acquisitions in Canada. And it assumed debt leverage could go to 2.5 times cash flow, rather than the current 2.2.

CML units haven’t given up as much ground this year as many trusts. But it’s nonetheless more than a third cheaper for US investors than where it began the year. Coupled with a yield of more than 8 percent–which the company increased a healthy 3.5 percent in June–that makes CML a strong bargain for even risk averse investors up to USD13.

For more information on Bird Construction and CML Healthcare, visit the How They Rate Table. Click on the “.UN” symbol to go to the Web site of our Canadian partner MPL Communications for press releases, charts and other data. These are substantial companies, so any broker should be able to buy them, either with their Toronto or over-the-counter (OTC) symbols. Ask which way is cheapest. Click on the trusts’ names to go directly to their Web sites.

Note that both trusts’ dividends are considered qualified for tax purposes in the US. Tax information to use as backup for filing them as qualified–whether or not there are errors on your 1099–is listed in the Canadian Edge Income Trust Tax Guide.

As is customary for virtually all foreign-based companies, the host government–in this case Canada–withholds 15 percent of distributions paid to US investors at the border. This tax can be recovered by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation, though unrecovered amounts can be carried forward to future years.

Both trusts will be subject to trust taxation beginning in 2011. As of now neither has made a definitive move on this issue. Both, however, should be able to mitigate much of the prospective burden and continue to pay big dividends long after the next tax kicks in, whether they reorganize as corporations or remain trusts.