Tuesday, October 26, 2010

Gordon Pape2, Toronto Money Show 2010

I listen to Gordon Page a second time when he gave a talk called “The Canada Report – High-Yield Opportunities in 2011”. The first thing Gordon Pape mentioned was that most Income Trusts have converted to corporations, or will do so soon. There will only be a few partnerships and Income Trust left after January 2011. Some of the former Income Trusts have been able to maintain their distributions at current level after their change to corporation. Since the distributions from former Income Trusts are now dividends, there are advantages to those companies being in non-registered accounts.

He then talked about survivor trusts that successfully change to corporation. There are all companies that he had recommended in the past. The first one he talked about was Atlantic Power (TSX-ATP), although he said it was not longer a buy as it was over priced. The next one he talked about was Crescent Point Energy (TSX-CPG), a conventional oil and gas company.

The next one he mentioned was Colabor Group Inc. (TSX-GCL). He said of this company that it was again a buy because of a weak 2nd quarter that has caused the price to pull back. This is a food distribution company and we should never sell a company based on one quarters result. The problem was that this company lost a good customer. However, it is still a solid company.

What Pape thinks we should be looking at for investments in 2011 is things like the remaining Income Trusts, REITS, dividend paying stock (of stable companies and banks which will soon rise their dividends), preferred shares, corporate bonds, ETFs and Mutual Funds. For Mutual Funds that have payouts, the important thing to look at is a NAV (net asset value). If the NAV is not going up, it could be that the fund is paying out too much and these funds should be avoided.

He said what we should concentrate on is dividend paying stock. We should look for companies that have a strong financial position and solid underlying assets. You want the company to emphasis shareholders’ interests and a responsible payout ratio. You would also want to pick a company that has a clear and transparent action plan and a stated distribution or dividend target.

He also mentioned what would be danger signs in dividend paying companies. The first is an unusually high yield, as the yield may not be unsustainable. Another is unrealistic payout ratios. Over the short term a company can maintain unrealistic payouts (that is over 95% of earnings or free cash flow), but they cannot do this over the long term. Some ex-Income Trusts can maintain their dividends because of tax pools, but if a company is depending on this, be sure that the tax pools are not to rapidly declining. What you need to know is how long a company’s tax pool will last. The tax pools will offset future taxable income taxes.

One company that he thinks is good is Yellow Pages Income Fund (TSX-YLO.UN). He feels that this company is undervalued and there are big barriers to others trying to enter the same business that Yellow Pages is in. He said that this company has plans to decrease their dividends (distributions) when they become a corporation in January 2011.

Another thing to be cautious about is when a company makes fundamental changes to its business plan. One example of this is Penn West Energy Trust (TSX-PWT.UN). This company will get back to its roots of oil exploration. Currently the company is one of largest conventional oil and natural gas producers. I have this stock and I will be selling because of this.

A company Pape feels is good value at the present time is Fort Chicago Energy Partners (TSX-PCE.UN). The company has a high risk level, but Pape feels it is also a good buy. It currently is a limited partnership, but it will be converting to a corporation. It has a well diversified and staple business. It has a consistent record of raising its distributions. It will keep its level of distributions on conversion to a corporation. The main risk is natural gas. The price of natural gas is a risk. This company has a currency risk and also an interest risk (because their debt level is high). Their distributions depend on the oil and gas environment. Pape does not think the distributions are at risk, but they could be. What he thinks will happen is that the stock price will go up and the yield will go down to 6 or 7% from the current one that is over 8%.

Another company that Pape recommended as a buy was Brookfield Infrastructure LP (TSX-BIP). He said this company has a moderate risk level. The distributions are paid in US$, so they can fluctuate. This company is a spin off of Brookfield. Since it is based in the Caribbean, the current changes in Canadian Tax law do not affect it. Pape say this is a stable and profitable business. It had a small increase in distributions this year and the payout rate is 61%. The management says they will increase the distributions at the rate of 3% to 7% per year. The risk level for this company is moderate. It runs regulated business in stable countries such as North and South America, Australasia, and Europe.

The next company he recommended was Arc Energy Trust (TSX-AET.UN). He says it has a high risk level. This company is in the oil and gas business and it is the oldest of the Canadian Income Trusts. The company is diversified into oil and gas. It has some 14.5 years of oil and gas reserves. They are getting Natural Gas from BC, but the area they are in has a big field and it is cheap. They have not stated that they will maintain their dividends on conversion to a corporation, but it is likely they will. There is a currency risk with this company.

The next company he recommended was a REIT. It is Crombie REIT (TSX-CRR.UN). Pape considers this company to be a moderate risk. The current yield is 7%. He feels it has done well and will continue to do so. Most of this company’s assets are in the Maritimes. Sobeys is their largest tenant and this tenant pays about one-third of the rent Crombie collects. Sobeys is a solid and stable company. Pape considers this stock to be a defensive stock.

The next company that Pape talked about was Medical Facilities Corp (TSX-DR.UN). This company’s units are called an Income Participation Units. (Income participation units out are a combination of a share of stock coupled with a bond. These corporations are not covered by the new Canadian Tax Laws on Income Trusts. He thinks this company is a buy also. All the company’s assets are in the US, but this company is based in B. C. Because of this, you will get a tax break on the dividend portion of its payout. The Payout is two-thirds interest and one-third dividend. The company has some problems with the management about getting its act together, but it should be profitable and no one disputes that it can maintain its distribution. He feels the risk level for this company is high because of management.

The next company Pape talked about was Inter Pipeline Fund (TSX-IPL.UN). He rates this company a buy. It has a current yield of 6.6% and is of a moderate risk level. The company will maintain its distribution into 2011 and beyond. Pape expects that the sock price will move up and the stock yield will move down.

The next stock he talked about was Keyera Facilities Income Fund (TSX-KEY.UN). The current yield on this stock is 5.8% and the risk level is high. This company has made a lot of money for shareholders. Its business is to provide services for Natural Gas producers. Because of this, the company’s earnings do not depend on the price of Natural Ga. Also, the company has said that it will continue to increase its dividend after it converts to a corporation. He also considers this company to be a buy currently.

Pape was asked about other companies. The first was Northland Power Income Fund (TSX-NPI.UN). He said he had looked at it but he would not recommend it yet. He is worried about their lack of diversification, as they seem to be only into wind power. Next, he was asked about Liquor Stores Income Fund (TSX-LIQ.UN). He says that this company will cut its dividend as a corporation, but that it should be a good long term buy.

Next, he was asked about Crescent Point Energy (TSX-CPG) and he said it was still a buy at $37 or $38. When asked about Pembina Pipeline Corp (TSX-PPL) he said it was still a buy and he liked it a lot. This company just recently changed from an Income Trust (TSX-PIF.UN) to a corporation and got a new symbol. The last company he was asked about was Daylight Energy Ltd (TSX-DAY). He says that this company has just cut its dividend. He feels it has a chance to be one of the top oil and gas producers and he likes the company. He said that when companies were income trust, you needed to look at payouts from cash flow. Now that companies have converted to corporations, you must look at payouts, not only from cash flow, but also from earnings.

He says if you go on his site of Building Wealth you can get 3 months of his advice newsletter (6 issues) for $20 plus tax.

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 website for stocks followed and investment notes. Follow me on twitter.

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