GREAT-WEST LIFECO INC. $23 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 944 million; Market cap: $21.7 billion; Price-to-sales ratio: 1.0; SI Rating: Above Average) is Canada’s second-largest insurance company after Manulife Financial Corp. (Toronto symbol MFC). The company also offers wealth-management services and owns Putnam Investments, a major U.S.-mutual fund company. Power Financial Corp. (Toronto symbol PWF) owns 68.7% of Great-West’s shares. The stock market downturn cut Great-West’s assets under administration by 14.7%, to $332.9 billion as of March 31, 2009, from $390.5 billion a year earlier. Great-West’s fees rise and fall with the value of the securities it manages, so the drop hurt its earnings: In the first quarter of 2009, earnings fell 33.9%, to $326 million from $493 million a year earlier. Earnings per share dropped 41.7%, to $0.35 from $0.60, on more shares outstanding. Great-West holds $2 billion in notes and other securities issued by U.K. and European banks. If conditions worsen, the company may have to write down some of these. However, government support of these banks lowers the likelihood of a big loss....

We continue to recommend that all investors own at least two of Canada’s big-five banks – Bank of Montreal, Royal Bank, CIBC, TD Bank and Bank of Nova Scotia. These are key safe investments for a portfolio. But these should not be the extent of your financial holdings. It is also essential to diversity within each economic sector. Other types of financial investments, such as non-bank financial companies, should play a role in your portfolio. Non-bank financial companies include property and casualty insurance companies, mutual fund companies, wealth management companies, mortgage lenders and more. It also includes life insurance companies. The best of these can be safe investments in a well-balanced portfolio. Recently, Canadian life-insurance stocks have been held back by investor concerns that the recession will continue to hurt their profits....

BOMBARDIER INC. (Toronto symbols BBD.A $3.78 and
BBD.B $3.65, Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.7 billion; Market cap: $6.4 billion; Price-to-sales ratio: 0.3; SI Rating: Extra Risk) is the world’s third-largest maker of commercial aircraft, after Boeing and Airbus. Bombardier’s aerospace division supplies about half of its revenue and two-thirds of its profits.

The remaining revenue and earnings come from Bombardier’s transportation division, which controls 22% of the global market. This makes Bombardier the world’s largest maker of passenger railcars and commuter trains. The company sells most of its trains under long-term contracts with large, well-financed customers, such as national railways and municipal transit authorities. This helps offset the cyclical nature of Bombardier’s aircraft business.

Bombardier’s revenue fell from $15.6 billion in 2005 (the company’s fiscal year ends January 31) to $14.8 billion in 2006, but rose to $19.7 billion in 2009 (all amounts except share price and market cap in U.S. dollars). It lost $0.08 a share (or a total of $122 million) in 2005. But thanks to a major restructuring of its railcar business, earnings jumped from $0.11 a share (or $192 million) in 2006 to $0.56 a share (or $1 billion) in 2009.

The recession has hurt demand for new aircraft. In the latest fiscal year, Bombardier delivered 349 planes, down from 361 the previous year. Orders for new planes fell more than 50%, to 367 from 698.

Despite the drop in deliveries, the aerospace division’s revenue rose 2.6% in fiscal 2009, to $10 billion from $9.7 billion the previous year. The gain was the result of higher selling prices for business jets, and increased revenue from repairing and maintaining aircraft. Its gross profit margin (its gross profits as a percentage of its revenue) rose to 9.0% from 5.8%. The division’s $23.5-billion order backlog is equal to 2.4 years of revenue.

...

CANADIAN UTILITIES LTD. (Toronto symbols CU $35 (class A non-voting) and CU.X $35 (class B voting); Income Portfolio, Utilities sector; Shares outstanding: 125.6 million; Market cap: $4.4 billion; Price-to-sales ratio: 1.6; SI Rating: Above Average) distributes electricity and natural gas in Alberta. It also operates power plants in other parts of Canada, the U.K. and Australia. ATCO Ltd. (Toronto symbols ACO.X and ACO.Y) owns 52.3% of Canadian Utilities. The company is evaluating a proposal to merge its Frontec division with ATCO’s Structures business. Both perform similar functions, including building temporary structures, airfields and communications systems for clients in the resource and construction industries. Canadian Utilities did not say how much this move would save it, but it plans to make a decision by the end of the second quarter. Meanwhile, Canadian Utilities earned $145.4 million, or $1.16 a share, in the three months ended March 31, 2009. That’s 3.3% less than the $150.3 million, or $1.20 a share, it earned a year earlier. If you disregard unusual items, including an insurance benefit stemming from an unplanned outage at its U.K. power plant in the year-earlier quarter, its earnings per share fell 1.7%. This plant is now operating normally, and that helped increase the company’s revenue by 3.8%, to $768.6 million from $740.6 million....

TRANSALTA CORP. $20 (Toronto symbol TA; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 197.8 million; Market cap: $4 billion; Price-to-sales ratio: 1.3; SI Rating: Average) operates over 50 electrical-power plants in Canada, the United States and Australia. TransAlta uses coal to generate 60% of its electricity, and owns three coal mines (two in Alberta and one in Washington State). This helps keep its costs down. Natural gas fuels 30% of the company’s electricity production, and hydroelectric and other sources account for 10%. This heavy dependence on coal has made TransAlta a target for environmentalists. To comply with tougher carbon-emission regulations, the company has teamed up with TransCanada Corp. to capture and store carbon emitted from TransAlta’s coal-fired power plants. The project could cost $400 million. The federal government plans to contribute $20 million to $30 million, and the two companies will probably split the rest....

FORTIS INC. $23 (Toronto symbol FTS; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 169.8 million; Market cap: $3.9 billion; Price-to-sales ratio: 0.9; SI Rating: Above Average) generates and distributes electricity in five Canadian provinces. It also owns power plants in the U.S. and Caribbean, as well as hotels and commercial real estate in Atlantic Canada.

Fortis is still benefiting from its July 2007 purchase of Terasen Inc., which distributes natural gas in B.C. In the three months ended March 31, 2009, Fortis’s revenue rose 4.8%, to $1.2 billion from $1.1 billion.

Terasen, driven by higher rates and increased natural gas use during the winter, accounted for 60% of this. Earnings rose 1.1%, to $92 million from $91 million. However, earnings per share fell 5.5%, to $0.52 from $0.55, on more shares outstanding. Gains at Fortis’s Canadian power plants offset a 43% drop at its Caribbean operations, as colder-than-usual weather and the recession hurt tourism. (The Caribbean power plants account for 7% of Fortis’s revenue.) Terasen’s earnings were flat.

Fortis is taking advantage of low real-estate prices to add to its properties division, which generates 4% of its revenue. In April, it paid $7 million for the 214-room Holiday Inn Select hotel in Windsor, Ontario. Despite the recession, this division is maintaining an occupancy rate of 96.0%, down slightly from 96.6% a year earlier.

The company has asked regulators for permission to raise rates at its Canadian operations this year (this includes Terasen). However, continued weakness at Fortis’s Caribbean operations will probably weigh on this year’s earnings. The stock trades at 15.3 times the company’s projected 2009 earnings of $1.50 a share. That’s a higher p/e than other utilities, but reasonable in light of Fortis’s high-quality operations and geographic diversity. The $1.04 dividend yields 4.5%.

...

EMERA INC. $20 (Toronto symbol EMA; Income Portfolio, Utilities sector; Shares outstanding: 112.3 million; Market cap: $2.2 billion; Price-to-sales ratio: 1.7; SI Rating: Average) generates and distributes electricity to roughly 600,000 customers in Nova Scotia and Bangor, Maine. Over the past few years, Emera has steadily expanded into new areas in order to cut its reliance on Nova Scotia, which still accounts for 85% of its revenue. It owns 12.9% of the Maritimes & Northeast natural-gas pipeline and 50% of a hydroelectric facility in Massachusetts. Emera has also expanded into the Caribbean region. In January 2007, it paid $22 million for 19% of the main power utility in St. Lucia. Last September, it bought 25% of Grand Bahama Power Company for $41 million. In April 2009, Emera formed a partnership with Algonquin Power Income Fund (Toronto symbol APF.UN), which owns or has interests in 41 hydroelectric facilities in Canada and the United States. Emera will pay $27.6 million for a 9.9% stake in Algonquin, with an option to buy an additional 5% of the fund over the next two years....

These are difficult times for income-seeking investors. Bonds yield around half of what they did 10 years ago, yet more and more investors are nearing retirement, when many pay close attention to investment income. Many also see income as a sign of investment quality. These factors have kept up investor interest in income trusts.

Despite Ottawa’s plan to start taxing trust distributions in 2011, income trusts should continue to pay above-average yields for years to come. Unfortunately, however, high current yields on the majority of trusts obscure their drawbacks.

Income seekers may mistakenly assume that yearly distributions on income trusts will hold steady, like interest on a bond, or rise, like dividends on a stock. But, in the long term, many trust distributions are apt to dwindle, or abruptly halt. That’s because many trusts own so-called “cash cow” businesses. These are businesses that can be milked for their cash flow for many years, but are likely to stagnate or stumble as the economy changes and competition grows.

Other income trusts borrowed to invest in cyclical industries. When the cycle turns downward, as it is now, profits and cash flow will evaporate overnight.

[ofie_ad]

...

Dividend reinvestment plans (or DRIPs) are plans offered by some companies that let shareholders receive additional shares in lieu of cash dividends. DRIPs can be a good way to slowly build wealth over a long period, for a number of reasons. First, they eliminate the nuisance of receiving small cash dividend payments. Second, some of them let you reinvest your dividends in additional shares at a 5% discount to current prices. Third, many dividend reinvestment plans also allow optional commission-free share purchases on a monthly or quarterly basis. To participate in these plans, you have to buy one or more shares of a company’s stock, and get a certificate registered in your name. Share registration (through a traditional or discount broker) can cost $40 or more per company. Then you call or write the company to ask for the form you fill out to enroll in the plan....

DUNDEE CORP. $5.10 (Toronto symbol DC.A; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 74.3 million; Market cap: $378.9 million; Price-to-sales ratio: 0.3; SI Rating: Average) is a holding company with subsidiaries in three main areas: wealth management, real estate and resources. Its main asset is its 49% stake (63% voting interest) in Dundee-Wealth Inc. (Toronto symbol DW). DundeeWealth provides investment management, securities brokerage, financial planning and investment advisory services. It also owns the Dynamic family of mutual funds. In all, Dundee-Wealth manages $56.2 billion worth of assets. In 2008, Dundee lost $196.3 million, or $2.62 a share. The loss was largely caused by writedowns of securities, including a $113.8-million charge related to its holdings of asset-backed commercial paper. In 2007, Dundee earned $277.6 million, or $3.49 a share. This figure included a $136.6-million gain on the sale of subsidiaries. Revenue fell 12.2%, to $1.2 billion from $1.4 billion. Dundee’s stock continues to be held back by fears of more writedowns of illiquid securities. As well, lower prices for oil, gold and other commodities have hurt the value of its resource-related investments. The recession could also hurt Dundee’s residential real-estate development business....