Editor’s Note: Please see our analysis of the latest news from our Dividend Champions in the Portfolio Update section following the article below.

One of the bittersweet aspects of being an income investor is that high-quality, dividend-paying stocks eventually attract the attention of acquirers.

True, a good deal means you get to collect a big, fat premium. But it also means that you’re losing a crucial income stream and must now sift through the market’s offerings to find another stock that offers an attractive payout.

Even so, we’re in a celebratory frame of mind: InnVest REIT (TSX: INN-U, OTC: IVRVF), which is among Canada’s largest hotel investors and one of this month’s Best Ideas for New Money, is being acquired by Hong Kong-based Bluesky Hotels & Resorts Inc. in an all-cash deal for C$7.25 per unit, a whopping 33% premium to the real estate investment trust’s (REIT) closing price prior to the announcement.

When we recommend a stock in our monthly Best Ideas for New Money feature, we’re not expecting an instant payoff. But in this case, we’ll take it!

Of course, Canadian Edge subscribers who bought InnVest back when we first recommended it last August are poised to book even bigger profits: a 42% gain, not including the reinvestment of the REIT’s monthly distributions. Not bad for nine months’ work.

While we scooped up InnVest when it was a relative bargain, Bluesky is paying a pretty nice premium: Not only is the offer well above where the REIT had been trading recently, it’s also nearly 15% above our assessment of fair value.

We first picked up InnVest nine months ago as a turnaround play. And as we fully acknowledged at the time, on its face InnVest didn’t quite have the right stuff to be a Dividend Champion.

As Canadian Edge’s Chief Investment Strategist Deon Vernooy wrote last August, “Let me get this off my chest right away: InnVest Real Estate Investment Trust is not a Dividend Champion. It has a poor dividend-payment record, too much debt and resembles a classic attempted turnaround, with all the business and investment risks that go with it.”

And with the unit price down 50% from its 2002 initial public offering, this REIT looked like it might be more trouble than it’s worth, possibly a classic value trap.

So what caught our attention aside from its deep value and then 8.1% yield?

When we look at a stock, we know that the data don’t always tell the whole story, especially for a turnaround.

And for value-oriented investors looking for high-quality stocks on the cheap, a big part of any bottom-up analysis should focus on management.

Thanks to activist investors, InnVest had recently undergone a change in management that more properly aligned its incentives with unitholders. Obvious conflicts of interest with its partner Westmont Hospitality Group had been eliminated, along with onerous fees that weren’t actually tied to operating results.

Equally important, not only did InnVest get a new, full-time CEO, the board also got a makeover, with a new chairman, and a slate of independent directors.

We also couldn’t ignore the promise of the REIT’s investment portfolio, which holds 109 properties, including historic hotels in tourist centers and business hubs. We saw that not only had InnVest made some quality acquisitions, but that it also stood to gain as renovations translate into greater revenues.

In addition to fundamental analysis, we take macroeconomic factors into consideration. The biggest one for Canadian hotel owners is the decline in the country’s exchange rate. With the Canadian dollar trading well below parity with the greenback, the country is an even more attractive destination for U.S. tourists.

Of course, at the time, we expected a successful turnaround would take at least a few years to unfold. But even with the attendant risks, we were content to collect InnVest’s high monthly distribution.

And we certainly weren’t expecting an imminent takeover. But naturally, the lower exchange rate has also attracted economic tourists, or M&A-minded corporate suitors.

In addition to the support and approval of InnVest’s board and management team, the deal also enjoys significant unitholder support, particularly the activist investors who helped engineer InnVest’s turnaround and own 29.1% of outstanding units.

The acquisition still needs to be put to a full unitholder vote at the annual meeting in late June, and it also needs to clear regulatory hurdles, particularly since the deal involves a foreign investor. Nevertheless, the transaction is expected to close in the third quarter.

So what’s next for InnVest unitholders who are ready to cash out? Well, we can’t promise that you’ll always be rewarded so quickly, but we have nearly 30 other Dividend Champions from which to choose.

Maybe check out some of our other Best Ideas for New Money. Hey, you never know.

The Dividend Champions: Portfolio Update

By Deon Vernooy

Tough operating conditions in Alberta necessitated some scratching and digging for Telus Corp. (TSX: T, NYSE: TU) to produce respectable numbers for the first quarter. Without adjustments (mainly for restructuring and depreciation costs), earnings per share were 6.8% lower compared to last year. On an adjusted basis, earnings per share were unchanged. The dividend was increased by 10%.

Sales increased by 2.6%, as both the wireless and wireline divisions delivered higher revenues. But operating expenditures increased by 4%, as both employee costs (including restructuring) and depreciation (higher additions to capital assets) jumped by 10%. EBITDA (earnings before interest, taxation, depreciation and amortization) was up by 0.4% without adjustments and by 3.1% if restructuring costs are excluded.

The wireless division increased adjusted EBITDA by 2%, as subscribers rose by 1.2% compared to last year and paid more on average for the use of their devices. Critically important, the average revenue per user increased by 1.2%, while the number of more profitable post-paid users climbed by 2.4%.

The secular trends in the wireline division continued, with landline connections declining while cable TV and high-speed Internet connections increased by 8.4% and 6.7%, respectively. EBITDA in this division increased by 5%, as data revenue jumped by 10%.

Additionally, Telus announced the proposed acquisition of one-third of the post-paid subscribers and dealer locations of Manitoba Telecom Services subject to the successful conclusion of BCE’s acquisition of MTS.

The company also announced the sale of a 35% interest in Telus International to the private-equity unit of Barings. Telus hopes to raise $600 million from the transaction, with the proceeds used to strengthen the balance sheet and fund further investments in telecommunications infrastructure.

The balance sheet deteriorated over the past year, with net debt increasing 19% as the company had to finance several spectrum acquisitions in short succession. The debt-to-capital ratio is now somewhat stretched, at 62%, but the company intends to reduce debt over time, as the benefits from the spectrum acquisitions and infrastructure buildout come to fruition.

Telus also affirmed that it will continue targeting dividend growth of 7% to 10% annually through 2019. However, we suspect that growth in the payout will be toward the lower end of that range as management brings leverage under control.

The company’s valuation remains attractive despite the profit slowdown, with an enterprise value to EBITDA ratio of 8 times, while the dividend yields 4.6%. We estimate Telus’ fair value at C$48, or US$37.                                                

Manulife Financial Corp. (TSX: MFC, NYSE: MFC) delivered a 12% increase in core earnings per share, excluding market gains and losses on the investment portfolio. The dividend was 9% higher than a year ago.

Asia was the best-performing region, with core earnings up 19% as premiums and deposits jumped by 39%.

The stock’s valuation remains reasonable, with a forward price-to-earnings ratio of 10 times, a price-to-book ratio of 1.0 times, and an attractive dividend yield of 4.1%.

Brookfield Infrastructure Partners LP (TSX: BIP-U, NYSE: BIP) reported a 15% increase in funds from operations per unit (FFO–an estimate of operating cash flow) for the first quarter. The dividend per unit was 7.6% higher than a year ago.

The company’s largest segment, Utilities, posted a 5% increase in FFO, while the second-largest division, Transportation, recorded slightly lower profits. The swing factor was the Energy division, where profits jumped 12% on the back of a higher contribution from existing operations and an increased stake in NGPL.

The balance sheet is fully levered, with a debt-to-capital ratio of 61%, though the credit rating remains investment grade.

For full-year 2016, FFO per unit is forecast to grow by 11%, while the distribution is expected to rise by 8%. The dividend yield remains attractive, at 5.4%.

CI Financial (TSX: CIX, OTC: CIFAF), the independent asset manager, produced somewhat disappointing results for the first quarter, with earnings per share down 8% compared to last year. The dividend was increased by 5%.

The company experienced its first net quarterly outflow of assets under management since 2012, as an institutional investor placed a large redemption. Profit margins were also squeezed, as the trend toward lower management fees for actively managed accounts continued.

Fund performance is a key factor in attracting new money, and here the company has been falling short of late, with the average ranking of its top 20 mutual funds now in the third quartile compared to its peer group over trailing time periods ranging from one to five years.

Fortunately, the balance sheet remains strong, and cash-flow generation is still abundant.

CI’s profitability is ultimately dependent on the performance of its investment funds, its ability to attract new assets, and the performance of the overall market. We see better days ahead for this high-quality operation, though it may take time for the portfolio managers to turn their performance around. Meanwhile, the valuation remains attractive, while the dividend yields 5.1% with a payout ratio of 70% of profits.

Finning International (TSX: FTT, OTC: FINGF) reported adjusted first-quarter earnings per share fell 42% year over year. The dividend remained unchanged.

Over the past year, Finning has been hard at work trying to align its cost base with the weaker operating environment, but cost reductions have failed to keep pace with the deterioration of the business.

Revenues in the company’s two key divisions, Product Support and New Equipment, held up reasonably well, especially in Canada, where new equipment sales increased by 11%. However, margins came under severe pressure, with sharp EBIT (earnings before interest and taxation) declines in all regions.

The outlook for the business remains challenging, as commodity producers adjust to the new reality of lower product prices. For the full year, earnings per share are expected to decline 19%, though a strong balance sheet and decent cash flow should ensure a stable dividend.

The forward price-to-earnings ratio seems expensive, but it will quickly correct when profits recover. The dividend yield remains an attractive 3.5%.

Inter Pipeline Ltd. (TSX: IPL, OTC: IPPLF) reported funds from operations per unit (FFO–an estimate of operating cash flow) 4% higher than a year ago. The dividend per share was increased by 6%.

The business performed well at the operating level, with a star turn coming from its European bulk liquid storage facilities, where higher utilization, an acquisition, and some foreign-exchange benefits boosted profits by 53%.

The oil sands transport business also performed well, with a 1% increase in volumes and a 7% rise in profits.

The only blemish from the operating side was the natural gas liquids extraction business, where lower volumes and prices resulted in an 18% drop in profits. This business, which has more direct exposure to volatile energy prices than the firm’s other segments, now contributes less than 10% of profits.

One item of note was a sharp increase in general and administrative expenses, as the company had to recognize a large one-off expense due to the cancellation of lease contracts related to a move to new headquarters.

The balance sheet remains solid, with the debt-to-capital ratio at 54% and investment-grade credit ratings from the main agencies. Capital expenditures continue to move sharply lower, as the multi-year expansion program comes to an end, which should allow further reductions in debt and increased distributions to shareholders.

The dividend yield of 6.2% remains attractive, and we estimate the fair value of the business at C$28, or US$22.

TMX Group (TSX: X, OTC: TMXXF) reported adjusted first-quarter earnings per share rose 1% year over year. The dividend remained unchanged.

Not unexpected, revenues declined by 4% as capital formation by listed companies slowed significantly over the past several quarters due to the weak market environment, especially for commodity producers. A bright light was the 17% increase in revenues from derivatives-trading activities.

Expenses were well controlled, with a 4% decline compared to last year, as the new CEO rightsized staffing levels, which declined by 9%. Net income increased by 8%, as “strategic alignment expenses” and finance costs dropped as well.

The balance sheet remains strong, with a debt-to-capital ratio of 21%. And the company continues to enjoy high investment-grade credit ratings.

The dividend yield is an attractive 3.1%, though we are concerned about the lack of dividend growth over the past few years.

The stock remains a relative bargain, priced at a discount of 25% to its global peers. However, the share price has advanced substantially over the past few months, and further gains may be limited for some time. We estimate the fair value at C$48, or US$37.