income trust

The main drawback to most income and royalty trusts is that many of them contain low quality assets. We aim to zero in on trusts with high quality assets that provide stable cash flows and distributions. Even the best trusts, such as these three, are still highly cyclical. However, we feel they will continue to pay above-average yields, even after Ottawa starts taxing trust distributions in 2011. Investors should limit their income trust holdings to no more than 15% of their overall portfolio....

GUARDIAN MONTHLY HIGH INCOME II FUND $15.14 (CWA Rating: Income) (GGOF Guardian Group of Funds, Commerce Court West, Suite 4100, P.O. Box 201, Toronto, Ontario M5L 1E8. 1-800-668-5613; Web site: www.ggof.com. Available from brokers) emphasizes more stable real estate investment trusts (REITs), and high-quality, long-lived resource trusts. We still think investors should diversify carefully with trusts, and emphasize those with stable cash flows, a low need for capital expenditures and mature business operations. The $1.0 billion fund’s top holdings are: Canadian Oil Sands Trust, RioCan REIT, Alta- Gas Income Trust, ARC Energy, Cominar REIT, Yellow Pages Income Fund, Vermilion Energy Trust, Bonavista Energy Trust, Enerplus Resources Fund and BFI Canada Income Fund....

ENCANA CORP. $62 (Toronto symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 755.4 million; Market cap: $46.8 billion; SI Rating: Average) gets about 80% of its total production from natural gas. The company’s oil sands projects in Alberta account for the remaining 20%. The company recently folded its oil sands operations into two joint ventures with U.S.-based ConocoPhillips. That sped up the development of these assets, and cut EnCana’s costs. Last year, EnCana considered converting its oil sands holdings into an income trust. But Ottawa’s move to tax trusts in 2011 killed that plan. It’s possible EnCana may simply hand out shares in this business to its shareholders....

MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 65.1 million; Market cap: $3.2 billion; SI Rating: Average) is Canada’s third-largest telephone company, after BCE and Telus. It is the leading provider of local, long distance and wireless telephone service in Manitoba, with over 90% of the market. Other services include Internet access and a digital TV service. Manitoba Tel’s revenue fell from $909.2 million in 2002 to $824.0 million in 2003. In June 2004, the company paid $1.6 billion for Allstream Inc., a national provider of telecom services to businesses. The purchase doubled the company’s size, and cut its reliance on Manitoba. This business now accounts for 55% of its total revenue. The Allstream acquisition pushed revenue up to $2.0 billion in 2005. Growing competition cut revenue in 2006 to $1.9 billion....

The likely takeover of BCE Inc. has pushed up prices of our two other telecom buys, Manitoba Telecom (see below) and Telus (see box on page 62). Any telecom takeover would face hurdles such as limits on foreign ownership and anti-competition concerns. But regardless of whether any takeovers occur, we feel all three of these stocks offer attractive long-term opportunities. Manitoba Tel is riskier than BCE and Telus, due to its heavy exposure to a single province and falling profits at Allstream, its Canada-wide business communications subsidiary. But the stock yields over 5%, and its profits are also improving thanks to a major restructuring plan. MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 65.1 million; Market cap: $3.2 billion; SI Rating: Average) is Canada’s third-largest telephone company, after BCE and Telus. It is the leading provider of local, long distance and wireless telephone service in Manitoba, with over 90% of the market. Other services include Internet access and a digital TV service....

BOMBARDIER INC. (Toronto symbols BBD.A $4.82 and BBD.B $4.79; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.7 billion; Market cap: $8.2 billion; SI Rating: Extra risk) estimates that demand for business jets will rise roughly 75% over the next decade, based on order backlogs and growing orders from international customers. Demand for regional jets is also improving, particularly for larger, more fuel-efficient models such as Bombardier’s new 100-seat plane. The outlook for the company’s transportation division is also getting brighter. It recently won new contracts to supply trains for public transportation systems in the UK and Shanghai, China. Bombardier is a buy. The multiple voting ‘A’ shares are the better choice....

SLEEP COUNTRY CANADA INCOME FUND $24.71 (Toronto symbol Z.UN; SI Rating: Extra Risk) is the largest retailer of mattresses in Canada. Mattress sets account for about 90% of its sales. Other products include head boards, foot boards, pillows, mattress pads, bed frames and sheets. Stephen Gunn (the current CEO), Christine Magee (the current president) and Gord Lownds launched Sleep Country in Vancouver in 1994. In April, 2003, the company came out as a new-issue income trust and began trading on the Toronto exchange. Sleep Country now has 121 stores and 10 distribution centres in B.C., Alberta, Manitoba and Ontario. In January 2006, Sleep Country bought Dormez-Vous Sleep Centres, a Montreal mattress retailer with five stores. In March 2006, Sleep Country purchased Sleep America, an Arizona mattress retailer with 32 stores in Phoenix and Tucson. There are now 18 stores in Quebec and 36 in Arizona....

Telus has been a top performer for us in the past few years. It got as low as $7.60 in 2002, mainly because investors feared it paid too much for its 2000 acquisition of wireless provider Clearnet. It then went on to a peak of $66 in September 2006. The final $12 of that rise happened after Telus announced that it planned to turn itself into an income trust. (Telus dropped its conversion plan after Ottawa decided to tax trust distributions.) But most of Telus’s gains since 2002 are due to the huge growth in its wireless business, which has helped offset slowing revenues at its traditional landline operations. Competition in the Canadian wireless industry will undoubtedly intensify in the next decade. But Telus’s ongoing investments in its wireless and traditional phone operations will give it a technological edge that will help fuel its long-term growth....

Real Estate Investment Trusts (REITs) dropped in price last November when Ottawa announced that it will impose a tax on income trust distributions in 2011. However, REITs were exempt from the prosposed new tax, and all of our REIT recommendations went on to reach new all-time highs. We advise against overindulging in REITs. But if you stick with the highest quality, like the REITs we recommend on this page, you should make attractive long-term returns with low risk. RIOCAN REAL ESTATE INVESTMENT TRUST $26.61 (Toronto symbol REI.UN; SI Rating: Average) is Canada’s largest REIT. RioCan has total assets of $4.6 billion, consisting of ownership interests in a portfolio of 206 retail properties across Canada, including nine under development. These properties contain over 52.1 million square feet of leasable area....

TRUE ENERGY TRUST $5.73 (Toronto symbol TUI.UN; SI Rating: Speculative) (403-264-8875; www.tketrust.com; Units outstanding: 70.3 million; Market cap: $402.7 million) produces oil and gas in West Central Alberta and West Central Saskatchewan. About 60% of its production is natural gas. True Energy has announced plans to convert from an income trust back into an exploration and development company. The company now pays a distribution of $0.12 per month. That will fall to a dividend of $0.02 a month. True Energy had cash flow of $0.50 a share in the three months ended September 30, 2006. So it now trades at a low 2.9 times cash flow. Total oil and gas production was up 52.3% in the quarter. True Energy has a large inventory of 600 drilling prospects and a significant undeveloped land base. The new structure and lower payout will give it the cash flow to exploit those assets....