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Rob Carrick

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High yields down east

Rob Carrick


OTTAWA (GlobeinvestorGOLD) — Down Nova Scotia way, there's a whale of a story to be told about an obscure income trust whose products are being eaten up by people all over the world.

Clearwater Seafoods Income Fund sold about $350-million worth of fish and shellfish in North American, Europe and Asia last year, which makes it the dominant fishing company on Canada's East Coast. If you like humble origin stories, Clearwater's a beaut. When it began in 1976, this enterprise consisted of a truck parked by the side of a highway near Halifax selling lobsters.

Despite its success, Clearwater quietly plies its waters without much notice. It doesn't have a high-profile retail presence like its East Coast neighbour, High Liner Foods Inc., and it hasn't generated many headlines since it was publicly listed as a trust in the late summer of 2003.

Not many mutual funds own Clearwater — although a few high profile ones have been recent buyers — and so few brokerage analysts follow this trust that GlobeinvestorGOLD.com doesn't even have a consensus rating in its database. That doesn't mean Clearwater belongs in the investing chum bucket, though. If you're looking for a source of income that isn't especially vulnerable to high interest rates and the traditional ups and downs of the economy, Clearwater might have something to offer.

Based in Bedford, N.S., Clearwater prides itself on being a vertically integrated seafood producer, which is to say that it harvests, processes, markets and delivers such products as flounder, haddock, pollack, scallops, lobsters, clams and shrimp. Clearwater puts a priority on sustainable fishing, so it uses techniques such as ocean-bottom mapping and satellite tracking technology to go after the big fish while leaving the rest to develop.

There are sleepy income trusts that seem to operate on cruise control, and others that are more like traditional business in that they have ambitions of growth. Put Clearwater in the latter group. Just about a year ago, it increased its production capacity by buying up scallop and groundfish quotas from High Liner, which has transformed itself into a processor of fish sticks and frozen seafood dinners.

All of this nets out to rock-steady distributions of 9.58 cents per month since this trust went public in the summer of 2002. At today's unit price, the yield is about 10.8 per cent on an annual basis. For income-oriented investors, Clearwater is a far better catch today than it was just a month or two ago, when its yield fell below 9 per cent. Like so many other trusts, it was caught in a sector-wide pullback that was touched off by a sudden realization that interest rates were likely to rise later this year or early in 2005.

Some trusts are clearly vulnerable to rising rates; power-generating and pipeline trusts in particular. Why own one of these lower-yielding trusts when you can get a less risky bond with a similar return once rates rise? Business trusts like Clearwater are a different matter, though. For one thing, their higher yield will continue to make them a clear alternative to bonds, no matter how much rates rise in the next year or more. Then there's the argument that the economic growth underlying rising interest rates will help spur consumption of seafood in grocery stores and restaurants. You have to be aware of the risks of holding a trust like Clearwater, though. While it may ride through a period of rising interest rates in fine shape, it could be vulnerable to a downturn in the fortunes of both the economy and seafood stocks.

Clearwater has a substantial market capitalization of $560-million, but it hasn't attracted much interest from institutional investors. At the end of last year, however, two big income-oriented mutual funds from GGOF Group of Funds and RBC Asset Management put in buy orders. Clearwater's an even more attractive buy today thanks to its recent price decline, and that's no fish story.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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