.
According to Michael Dechter, Canadians should look at their income trusts in terms of the business they operate to decide whether they will still be good investments following the 2011 conversion to corporations.
Dechter says that the investment will continue to be good whether or not the company decides to convert so long as the underlying business is a good one and the company earns its distribution. If a company already has a very high payout ratio, this could also present a problem.
Dechter likes to separate the income trusts into three “baskets” – one full of trusts he loves and will continue to be great investments; one full of trusts that will still be good investments but which will have to reduce their distribution or dividend, and a third basket of
In the first basket, Dechter places Crescent Point Energy (TSE: CPG) (which has already done its conversion, InterPipeline (TSE: IPL.UN) and Just Energy (TSE: JE.UN).
In the second basket, Dechter would put companies like Precision Drilling (TSE: PD.UN), companies that he says would be great to hold after the transition, but not great to hold through the transition, because only afterwards will we see whether the distribution will be merely reduced, or cut entirely so that the company can transition from income towards a growth and acquisition model.
Bottom line, investors need to be actively selective during this phase with regard to income trusts. It’s better not to simply hold a basket and wait.
My view: if you already own income trusts, I don’t see the harm in holding on. If you haven’t found out yet, you’ll see exactly what they will do over the next year. Don’t expect major price moves due to the transition – this will already be well baked into the trusts at this point.
If there’s a trust you’re interested in buying and you don’t own any yet, then you might as well do the research and see in advance what its plans are. If the company is going to cut the distribution and become a growth company, then you might not want to buy it at all.
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{ 6 comments }
Another good, concise read ME!
I really like the first “basket” you have listed above – CPG, IPL and JE. I’m looking into putting some of my 2011 TFSA there. JE.UN will continue to be a distribution company (that continues to grow) from what I know of. I think you commented on my blog about it (thanks :)
http://myownadvisor.blogspot.com/2010/05/are-income-trust-changes-just-like-y2k.html
How about you, do you own any of these right now? If so, do you keep your income trusts registered or unregistered?
Nice article! I was missing your interesting posts. Don’t you think Pembina Income Fund (PIF.UN) should had been from the list too? The company announced it will keep the current 1.56$ dividend after conversion and even after. Pretty hot! For some companies, conversion do not change a thing, dividendly speaking. But they appear to be just a few.
I have always been under the impression that investors purchased Canadian Income trusts because they had high yields, not because they understood the business they were buying into. Some income trusts that have converted into corporations such as Precision Drilling (PDS), Advantage Oil and Gas (AAV) and Enterra (which is now called Equal energy) have suspended distributions.
I guess the lesson to be learned is that investors should diversify, not concentrate their portfolios; investors should not chase yields, without understanding the business and why there is a high yield; and also do not be greedy.
@DGI – No doubt Money Energy would agree with you, chasing yield is a poor decision alone. I’m with you there! Chasing a good company, with a good history that provides a good yield, something altogether different.
I agree with you all there – I admit that when I first started out it was the yield that drew me to income trusts – but I quickly learned my lesson when certain companies were taken over after their yields became too high, and then the pain of distribution cuts during the financial crisis.
It’s really important to stick with solid, sustainable yields. An 8% yield means nothing if it can only last a year. Go with the 3.5% yield that will grow once, twice a year for the next 10-15 years.
Hey ME and others – It will be interesting to see what LIQ.UN-T does. They are planning to convert. Current yield is a tidy 10.5%. Might be a good non-energy high-dividend payer to hold. Thoughts?
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