income trust
We’ve mostly avoided resource income trusts, due to their generally low investment quality. But we made an exception for Pengrowth (Toronto symbol PGF.UN), which is the sole oil & gas trust we recommend in The Successful Investor. We made a second exception for Pengrowth by recommending it on two of our Portfolios: our Aggressive Growth Portfolio and our Portfolio for Income-seeking Investors. The trust’s high-quality oil and gas properties make it a reasonably safe investment, compared to our other Aggressive Portfolio recommendations. We think it stands to prosper if oil settles into a long-term $40 U.S. to $80 U.S. trading range as we expect....
FPI LTD. $7.85 (Toronto symbol FPL) earned $0.25 a share in the third quarter of 2006 compared with a loss of $0.35 a year earlier, thanks to cost controls and the extra earnings from recent acquisitions. However, sales fell 15.4%, to $174.5 million from $206.2 million, due to lower selling prices for fish products and the high Canadian dollar. Hold. FORDING CANADIAN COAL TRUST $24 (Toronto symbol FDG.UN) has reorganized itself from an income trust into a royalty trust. The change removed restrictions on foreign ownership, and should increase Fording’s liquidity (the units also trade in New York). The new structure will not affect Fording’s current $3.80 annual distribution rate, which yields 15.8%. Buy. GENNUM CORP. $14 (Toronto symbol GND) has gained over 40% in the past six months, mainly due to a new plan to improve customer service. The company also aims to expand its overseas sales. Gennum probably earned $0.55 a share in its fiscal year ended November 30, 2006. But profits could grow to $0.77 in fiscal 2007, and the stock trades at 18.2 times that figure. Buy....
FPI LTD. $7.85 earned $0.25 a share in the third quarter of 2006 compared with a loss of $0.35 a year earlier, thanks to cost controls and the extra earnings from recent acquisitions. However, sales fell 15.4%, to $174.5 million from $206.2 million, due to lower selling prices for fish products and the high Canadian dollar. Hold. FORDING CANADIAN COAL TRUST $24 has reorganized itself from an income trust into a royalty trust. The change removed restrictions on foreign ownership, and should increase Fording’s liquidity (the units also trade in New York). The new structure will not affect Fording’s current $3.80 annual distribution rate, which yields 15.8%. Buy. GENNUM CORP. $14 has gained over 40% in the past six months, mainly due to a new plan to improve customer service. The company also aims to expand its overseas sales. Gennum probably earned $0.55 a share in its fiscal year ended November 30, 2006. But profits could grow to $0.77 in fiscal 2007, and the stock trades at 18.2 times that figure. Buy....
Starting in 2011, Ottawa will impose a tax on income trust distributions that will put the income trusts on an equal tax footing with conventional taxable corporations. Trusts will pay a 31.5% tax on distributions to unit holders, so your cash flow from those trusts will fall by the same amount. However, if you hold trusts outside of registered plans such as RRSPs and RRIFs, you will not see a large change in your after-tax position — even though the distributions you receive will likely drop by 31.5%. That’s because the distributions will now be taxed as dividends and Canadians will benefit from the lower tax rates provided by the combination of the dividend tax credit and the dividend gross-up (foreigners don’t quality for the favourable dividend treatment). For example, in Ontario, investors in the top tax bracket now end up with about $536 after tax on each $1,000 of trust income. Under the new tax proposals, investors holding trusts outside of RRSPs will end up with about $532 after tax. The difference is roughly similar for the other provinces....
Here are three key rules you’ll need to follow to invest safely and successfully in 2007. 1. Make sure you have substantial U.S. market exposure — 20% to 30% of your equity investments, if not more. Some Canadian investors have avoided the U.S. market recently. They worry that Americans are spending too heavily on consumer goods, especially with borrowed money, while neglecting to save. But the low U.S. savings rate is a misconception. That’s because the conventional method of calculating the U.S. savings rate excludes capital gains on stocks and real estate, and the build-up of value in U.S. pension funds. Yet this is where many Americans hold most of their life savings....
CANADIAN NATIONAL RAILWAY CO. $54 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; SI Rating: Average) plans to increase capital spending in 2007 by 4% over 2006. About half will go to basic items like replacing tracks and repairing bridges. It will also buy new locomotive and other railcars that will cut its fuel costs and improve safety. CN Rail is a buy. GREAT-WEST LIFECO INC. $34 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; SI Rating: Above average) continues to expand its retirement savings and healthcare insurance operations in the United States....
TELUS CORP. (Toronto symbols T $62 and T.A $62; Conservative Growth Portfolio, Utilities sector; SI Rating: Above average) is the main provider of telephone service in Alberta, British Columbia and parts of Quebec, with roughly 4.5 million customers. It also operates a national wireless service under the Telus Mobility banner. Back in October 2000, Telus acquired wireless provider Clearnet Communications Inc. This gave Telus an instant national network, and let it avoid having to build its own network from scratch. Demand for wireless services has soared since the acquisition, and now supplies half of Telus’s revenue and two-thirds of its cash flow. Along with the Clearnet business, Telus acquired substantial tax loss carryforwards, which is could use to offset its taxable income. However, the company is now close to using up all of the tax loss carryforwards. Rather than let its tax rate shoot up, the company unveiled plans in September to convert itself into an income trust. The stock shot up on the news....
BCE INC. $33 (Toronto symbol BCE; Conservative Growth Portfolio, Utilities sector; SI Rating: Above average) is Canada’s largest provider of traditional telephone services, with over 12 million customers in Ontario and Quebec. It also provides Internet access (Sympatico), satellite TV (Bell ExpressVu) and wireless services (Bell Mobility). In the past few months, the company has moved to unlock some of its value. It recently sold most of its interest in Bell Globemedia, the private company that owns The Globe and Mail and CTV Television. BCE also plans to sell a minority stake in satellite operator Telesat to the public. In July 2006, BCE merged its rural telephone business with 53.2%-owned subsidiary Aliant Inc. into a new income trust called Bell Aliant Regional Communications Income Fund....
Both BCE and Telus have unveiled plans to convert into income trusts, which helped spark a rise in their stock prices. Canada’s other big telecom company, Manitoba Telecom, moved up on rumors that it too would convert. The trust structure will let BCE and Telus avoid a big tax increase in the next few years as certain tax shelters expire. But investors have higher payout expectations of a trust compared with a regular company. Telecom companies must invest large sums in new equipment, or risk losing customers. These costs could hurt BCE’s and Telus’s ability to raise future cash distributions....
CANADIAN UTILITIES LTD. $37 (Toronto symbol CU (old symbol CU.NV); Income Portfolio, Utilities sector; SI Rating: Above average) is one of Alberta’s leading suppliers of natural gas (940,000 customers) and electricity (211,000 customers). It also operates power plants in other parts of Canada, Australia, and the UK, and provides engineering and related services to other gas and power companies. The company is slowly shifting its focus to its regulated businesses, which supply about half of its revenue and income. While that limits its growth prospects, it greatly cuts its risk and helps provide it with more predictable cash flows.