income trust

Starting in 2011, Ottawa will impose a tax on income trust distributions that will put income trusts on an equal tax footing with conventional taxable corporations. Trusts will pay a 26.5% tax on distributions to unitholders, so your cash flow from those trusts will fall by the same amount. The exceptions are our real estate investment trust (REIT) recommendations. That’s because qualified REITs are exempt from the new tax on distributions. To qualify, REITs must meet the following requirements:...

MDS INC., $5.36, Toronto symbol MDS, gets all of its medical isotopes from the 52-year-old Chalk River nuclear reactor near Ottawa. The reactor was shut down this week after its operator, Atomic Energy of Canada Ltd., discovered a water leak. (Water helps stabilize the nuclear fission process.) Atomic Energy estimates that it will take at least a month to repair the leak. MDS makes over half of its earnings by selling isotopes to medical labs, which use them to detect and treat cancer and other diseases. The company estimates that a prolonged outage will cut its gross earnings by $4 million a month (all amounts except share price in U.S. dollars). MDS earned $2 million, or $0.02 a share, in the three months ended January 31, 2009....

AltaGas Income Trust, $15.30, symbol ALA.UN on Toronto (Units outstanding: 76.3 million; Market cap: $1.2 billion), extracts, processes and distributes natural gas. It also processes natural-gas liquids. AltaGas has five segments: 1) The field-gathering and processing division operates 6,500 kilometres of pipelines that move natural gas from producing wells to more than 70 field-gathering and processing facilities in Alberta....

NEWELL RUBBERMAID INC., $6.91, New York symbol NWL, has cut its quarterly dividend by 52.4%, to $0.05 a share from $0.105. The new annual rate of $0.20 yields 2.9%. Newell makes plastic storage bins, tools, window blinds, pens and a number of other household items. Aside from Rubbermaid, Newell’s brands include Sharpie, Paper Mate, Waterman and Levolor. The recession is prompting Newell’s customers to switch to cheaper, generic versions of the company’s products. The lower dividend should save Newell about $61 million a year. (In 2008, Newell earned $338.7 million, or $1.22 a share before unusual items.) The company needs the cash to repay $750 million in debt that comes due during the second half of this year. If you include long-term borrowings, Newell’s total debt was $2.9 billion at the end of 2008....

Essential Energy Services Trust, $0.95, symbol ESN.UN on Toronto (Shares outstanding: 59.9 million; Market cap: $56.9 million), provides well-maintenance services to oil and gas producers in western Canada. Essential began trading at $9.65 a unit on Toronto in May 2006, after Avenir Income Trust handed out units of its Essential Energy Services division to Avenir unitholders. Essential operates independently of Avenir. In July 2007, Essential bought four private energy-service companies for $22.3 million: Anderson Well Servicing, Blue-Vac Vacuum Truck Service, Canadian Coil Tubing and Redneck Flushbys. In April 2008, Essential added Builders Energy Services Trust in exchange for units valued at $74 million....

Sentry Select Diversified Income Fund, $2.17, symbol SDT.UN on Toronto (Shares outstanding: 219.7 million; Market cap: $476.8 million), is a closed-end mutual fund that mainly invests in royalty trusts, income trusts and real estate investment trusts (REITs). The fund also invests in high-yielding common shares. Earlier this year, the fund changed its name to Sentry Select Diversified Income Fund. (It was formerly Sentry Select Diversified Income Trust.) The change is meant to reflect management’s intention to keep buying dividend-paying common stocks, while cutting the fund’s income trust holdings. About 19% of the roughly 90 investments Sentry holds are common stocks, and the rest are mostly trusts. Sentry is doing this in response to Ottawa’s plan to start taxing trust distributions in 2011. In many circumstances, the new tax will eliminate the tax advantage income trust distributions hold over dividends....

Energy Savings Income Fund, $10.40, symbol SIF.UN on Toronto (Shares outstanding: 106 million; Market cap: $1.1 billion), sells natural gas to homeowners, small to mid-sized businesses and small industrial customers under long-term, fixed-price contracts. The income trust sells gas in Ontario, Quebec, B.C., Alberta and Manitoba, as well as Illinois and Indiana. Energy Savings started up in 1997, and began trading on Toronto in April 2001. The trust first sold units to the public at $10. Energy Savings also markets electricity in Ontario, Alberta, New York and Texas....

Essential Energy Services Trust, $0.86, symbol ESN.UN on Toronto (Shares outstanding: 59.9 million; Market cap: $40.1 million), provides well-maintenance services to oil and gas producers in western Canada. Essential began trading at $9.65 a unit on Toronto in May 2006, after Avenir Income Trust handed out units of its Essential Energy Services division to Avenir unitholders. Essential operates independently of Avenir. In July 2007, Essential bought four private energy-service companies for $22.3 million: Anderson Well Servicing, Blue-Vac Vacuum Truck Service, Canadian Coil Tubing and Redneck Flushbys. In April 2008, Essential added Builders Energy Services Trust in exchange for units valued at $74 million....

Is it a good time to bargain hunt for Canadian income trusts? According to one school of thought, Ottawa’s planned 2011 removal of income trusts’ tax advantages has unduly rattled investors and spurred unwarranted selling. That’s the kind of assumption that makes sense, but it’s unlikely to make you any money. Tax-law changes are a drawback for some investors in Canadian income trusts. But the key problem with income trusts is their general lack of investment quality....

TECK COMINCO LTD. $45.00, Toronto symbol TCK.B, has agreed to buy the 80.1% of FORDING CANADIAN COAL TRUST $89.90, Toronto symbol FDG.UN, that it does not already own. Fording unitholders will receive $82.00 U.S. in cash and 0.245 of a Teck class B subordinate voting share per unit. Fording’s units are trading about 5% below the implied value of the offer of $95.07, which indicates that a higher bid is unlikely. Teck’s offer is worth about $14.1 billion, including $1.5 billion in new shares. The purchase price is a high 67% of Teck’s market cap of $21 billion. However, Fording’s main asset is the Elk Valley coal project in British Columbia, which Teck currently manages. That eliminates the possibility of an unpleasant surprise. As well, full control of Fording will immediately add to both earnings and cash flow. Teck aims to complete the takeover by the end of October. Teck is a buy. Fording investors should hold, and tender their units to get the full amount without paying brokerage fees....