Wednesday, November 6, 2013

Money Show 2013 - Roger Conrad 2

Roger Conrad is Founder and Chief Editor of Capitalist Times. His web site is here. His talk was entitled "Former Income Trusts: Still Your Best Buys for Reliable Growth and High Yield".

Yellow Media (TSX-Y) is taking longer to turn around that he thought it would.

Dividend socks are not bonds and we should not get out of them when interest rates rise. Utilities are an essential service, that is energy (electric) and water. We are four and half years into a bull market. The central bank will taper and interest rates will spike. The conventional wisdom is that this will cause dividends stocks to crash. For corrections, the following table shows the co-relation of indexes and 10 year treasury bonds.

Index S&P 500 10 year Treasury
Dow 0.365 0.001
S&P500 1.000 0.261
TSX Energy 0.661 0.219
TSX Oils 0.831 0.222
Telecom 0.398 0.035

Rate sensitive stocks follow the stock market not interest rates. The Income Trusts that converted to corporations in 2011 just hit a new all-time high beating the TSX and beating the S&P500. Monthly payouts are effective cash management.

The Halloween massacre of 2008 weeded out the weak companies. These companies are debt and risk adverse. They have strong businesses and returned to dividend growth following conversions. Of course, not all old income trust companies were winners. There was no rising tide to raise all boats post 2008 crash.

There is sector weakness in unregulated electricity, energy, drilling, restaurant products and logistics. Debt is increasingly toxic. Many ex-income trusts reassessed their big dividend payouts. For example, Atlantic Power (TSX-ATP) just cut their dividends. Some companies have been in a race to the bottom.

The dividend markers have characteristics of dividend growth, consistent dividend payout ratio (DPR), have moderate debt with light refinancing needs, have a business model build for dividends, healthy growth with solid management and are diversified and balanced. Companies have cut dividends due to debt. Companies that had not paid dividends before being coming income trusts because of fluctuating earnings, do not have a business model for dividends

Bird Construction (TSX-BDT) is a major engineering company. Most construction has been volatile, but they are in big projects and have solid earnings. This have 5.8% yield that grows at 5.5% per year. The debt is low. The DPR is 92.6%. They have seasonal and steady returns. It is a nice company with a nice dividend.

Davis and Henderson (TSX-DH) is a financial tech and related services firm for banks in US and Canada. The yield is 4.8% growing at 3.2% per year. The risk for this company is potential weakness in banks. The valuations are rising. The DPR is 55.4%. Earnings and debt are not an issue and they are making acquisitions.

Dundee REIT (TSX-D.UN) is an office REIT. Its yield is 7.7% and the 12 month growth rate is 2%. The DPR is 77.7% of FFO. Occupancy rates are 94.9%. The company rents at 11% below the market. The risks are the over building in Canadian cities which is a re-leasing risk and growth by acquisitions might be scarce. There is not a lot of risk and it is priced in. This company does not have much co-relation with interest rates.

EnerCare Inc. (TSX-ECI) rents waterheaters to homeowners and operates sub-metering contracts. The yield is 7.1% and 12 month growth in dividends is 3.6%. The DPR is 73%. The risks are changeable regulations and flooding damaged. It is targeted by another firm and there is an ongoing proxy battle that is pushing up the stock price.

Newalta Corp (TSX-NAL) is cleaning up for resources. The yield is 2.8% and the 12 month dividend increase is 11%. The DPR is 22%. The company provides a range of recycling/clean up services for heavy industry and energy. Its credit rating is BA3-Moody (stable) and DD-DBRS (stable). It got hit in 2008 and converted to a corporation and cut its dividend. It has continued to grow the underlying business and it has recovered. It is on a sustainable path, unlike 5 to 6 years ago. It is more diversified.

Northern Property REIT (TSX-NPR.UN) owns and operates apartment properties in remote resource producing regions of Canada. Its yield is 5.5% and the 12 month stock growth is 3.3%. The DPR is 69.3% of FFO. They are into places such as Yellowknife. Their occupancy rate is 93.5%. The weakest province is B. C. with a 15.3% vacancy rate. This stock has been expensive in the past but not now. It had to sell senior housing as an income trust. The risk is Canadian Tax changes for REITs and vacancies in key markets.

Shaw Communications (TSX-SJR.B) operates broadband, cable, internet and satellites. The yield is 4% paid monthly. The 12 month growth in dividends is 5.2%. The credit rating is BBB-DBRS (stable) and BAA3-Moodys (Stable) and BBB-S&P (stable). The risks are erosion of market share to competition, change in favorable regulations and valuation concerns. It could be a takeover target.

Student Transportation (TSX-STB) owns and operates school bus systems, some are under contract. The yield is 8.3% and the 12 month dividend growth is 0%. The DPR is 79%. Potential revenue growth is 11%. The risks are fuel costs and poor performance leading to loss of contracts. This stock has attracted short sellers, but they have no done well. It is growing with acquisitions.

There are several things to avoid with these sorts of stocks. The first thing to avoid is stocks with 10% plus yield unless you are willing to bet they'll overcome their challenges. Beware of downward shift in guidance and pay attention to conference calls. Weak producers will be vulnerable to widening oil and gas price differentials. (Our oil and gas prices are low.) Watch debt and DPRs for danger signs.

Roger Conrad has a several newsletters. The first is Utility Investor. Another is Capitalist Times. The last one is Energy and Income Advisor. Go to the web sites or call Sherry at 1-888-860-2759 to subscribe.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.


  1. Thank you for posting Susan, very interesting.

    I own DH and STB. I made a great return on DH, I had been holding that one like forever now. I was scared with the acquisitions they were making, like that mortgage software thing, but it turn all well.

    ECI used to be a Derek Foster stock. I own just a few shares of ECI now.

    I sell ATP at lost. I would have preferred not to read about ATP in this post because this one was painful. I enroll into a lawsuit with a firm of New York, - maybe in a few years from now I will get something.

    NAL seem interesting, I will have a look at that one.

    Keep posting.

    1. The stock that I have that you have mentioned in DH and I have done well on this. I hae followed ATP, but did not like it. Thnaks for the comments.