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Minister of Finance Jim Flaherty's Halloween massacre left many income trusts with gravely wounded prices but no serious illnesses. A field of 250 income trusts tracked by the S&P/TSX Capped Income Trust Index fell by 16.2 per cent in the two trading days ended Nov. 2.
"The market overreacted and the babies were thrown out with the bath water," says Jackee Pratt, Vice-President at Mavrix Fund Management Inc. in Toronto and portfolio manager of the Mavrix Canada Fund. Panic selling by some investors in reaction to the announcement caused the loss of $20-billion in market value. The result - many income trusts are selling at bargain prices.
Ms. Pratt used the market drop to shop for bargains. Her list includes:
Arc Energy Trust (AET.UN), which fell from $27.56 On Oct. 31 to $21.70 on Nov. 2. Its $2.40 cash dividend yields 11.0 per cent based on the Nov. 9 closing price of $21.85. She increased her fund's holdings of Arc in the wake of the Oct. 31 announcement.
Penn West Energy Trust (PWT.UN) fell from $42.21 on Oct. 31 to $33.75 on Nov. 2. Its $4.08 annual distribution amounts to a 12.0-per-cent yield based on the Nov. 9 close of $33.88. Ms. Pratt added to her position in the expectation that the company's management will figure out a solution to its potential tax issues in the next four years.
UE Water Heater Fund (UWH.UN) dropped from $15.20 on Oct. 31 to $11.40 on Nov. 2. UE's 98.4 cent annual dividend generates a 7.8-per-cent yield based on the Nov. 9 closing price of $12.60 in a business whose earnings per share rose by 7.4 per cent in the 12 months ended Sept. 30, 2006. Ms. Pratt added to her holdings.
E.D. Smith Income Fund (JAM.UN) fell from $8.79 on Oct. 31 to $7.08 on Nov. 2.. Its $1.03 annual distribution yields 14.8 per cent based on the $6.95 closing price on Nov. 9. Units have dropped substantially from fall, 2005 when they traded above $12.00. Investors lowered their growth expectations for the company prior to the announcement, but Ms. Pratt added to her holdings nonetheless.
BFI Canada Income Fund (BFC.UN) fell from $30.41 on Oct. 31 to $23.20 on Nov. 2. BFI's $1.82 annual dividend yields 7.2 per cent based on the Nov. 9 closing price of $25.15. BFI, the biggest waste disposal company in Canada, saw its earnings per unit rise by 93 per cent in the 12 months ended Sept. 30, 2006. The company is also buying back units. BFI is on her shopping list, Ms. Pratt says.
Robert Lauzon, Managing Director of Middlefield Capital Corp. in Toronto, helps pilot the company's income portfolios. In the wake of the Oct. 31 slaughter, he shopped for:
Crescent Point Income Fund (CPG.UN), an upstream oil exploration and development company that was at $20.22 on Oct. 30. Units fell to $15.75 on Nov. 2. With a $2.40 annual distribution, units yielded 14.5 per cent based on the Nov. 9 closing price of $16.55. The company has an 11-year reserve life compare to 10 years average in he oil patch, Mr. Lauzon said. The bottom has passed and units could rise to $18 or $19, he suggested.
Alta Gas Income Trust (ALA.UN) is a gas gathering and processing network in Alberta. Units that had been trading at $28.68 fell to $24.19 in the wake of the announcement. The annual distribution of $2.00 yields 8.3 per cent based on the Nov. 9 closing price of $24.16. The company has unused tax shields that will allow it to postpone income tax payable after it is required to account as would a corporation in 2011. As well, it is a potential takeover candidate, Mr. Lauzon said. He bought some for his portfolio.
Mullen Group Income Fund (MTL.UN) is a an Alberta-based oil field service and transport company. Units that had traded at $22.60 fell to $17.60 on Nov. 2. The annual distribution of $1.80 yields 10.0 per cent based on the Nov. 9 closing price of $18.06. Mullen's earnings have risen to $2.41 for the 12 months ended Sept. 30 from $1.24 a year earlier, Mr. Lauzon added to his position in the days following the collapse of the trust's unit price.
Tom Czitron, Managing Director and Head of Income and Structured Products for Sceptre Investment Counsel Ltd. in Toronto, reviewed his income trust holdings after the Oct. 31 debacle. On his shopping list:
Livingston International (LIV.UN), a customs brokerage, which, he says, is a buy after falling from $24.00 on Oct. 30 to $18.79 at the close on Nov. 2. The company distributes $1.70 per year, an 8.8-per-cent yield based on the Nov. 9 closing price of $19.28. The company registered a 42.6-per-cent increase in net income for the six months ended June 30, 2006.
Vermillion Energy Trust (VET.UN) is an energy company active in Canada, Europe and Australia. Units that traded at $36.80 on the eve of the announcement fell to $31.38 on Nov. 2. With a $2.04 annual distribution that yielded 6.2 per cent at market price on Nov. 9, the company has a good if not spectacular growth record.
Sleep Country Canada (z.un) - a maker of mattresses, was trading at $26.35 on Oct. 30. It fell to $23.12 on Nov. 1, then closed at $23.90 on Nov. 2. Its $1.40 annual distribution yields 5.6 per cent at the $25 price to which it had recovered on Nov. 9. For the nine months ended September 30, 2006 sales rose 45.9 per cent to $237.0 million compared to the same period a year earlier. On Oct. 26, the company announced an increase in distributions to $1.40 per trust unit a year from the previous annual rate of $1.35 per unit. This is one income trust that can help the investor sleep easily.
Andrew Allentuck writes about investments for The Globe and Mail, and reviews books on finance for globefund.com and globeinvestor.com. He is also the author of several books.