Dear Double Digit Income Investor,
We had a lot of questions on the Blog about the Canadian Royalty Trusts (Caroys) sector and I promised I would answer them in one complete update.
Since so many of the questions were the same, I’ve consolidated them and here is my position at this time:
Question: What is happening with the Canadian Royalty Trusts? If I own them, should I sell, and if I don’t own any, should I buy?
Answer: In a nutshell, many of the non-energy related Canadian Income Trusts are marching to a different drummer. Some trusts like Arctic Glacier (AGUNF) told me they intend to raise their dividend enough, down the road, to offset the forthcoming tax so shareholders can still maintain their after-tax yield at current levels. This probably explains why the stock has rebounded so well.
Others, like VersaCold Income Fund (VCLDF), are also back in the black since the announcement while the Priszm Income Fund (PSZMF) raised its dividend and is showing some recovery.
KCP Income Fund (KCPIF) has not rebounded with the other business trusts and is still down on the mat. I put a call in to the CEO after the company posted a story that they are exploring alternatives to enhance shareholder value, so I would sit tight until we learn the whole story.
So it’s a mixed bag for many of the Canadian income trusts. Some are moving back up, many are flat or still down, but remember, most of these are excellent businesses that still pay large dividends.
Needless to say, the rough spot in the Canroys are the Canadian Energy Income Trusts. They are beset by lower oil and natural gas prices of late, and these stocks are back down to their early-November "reaction lows" and seem to be once again groping for a bottom. My advice here is that if you own them, hold them. It looks like winter is finally going to show up for us next week in the Northeast, and I'm beginning to see some firming in the sector today.
At this point, investors have to look at these oil and gas trusts as energy stocks with benefits. Nothing in the U.S. energy patch pays the kind of dividend yields these stocks pay. They grow their reserves every year and will pay out whopping yields for the next four years -- at which time they will pay out an after-tax yield of about 8%. Folks, that is still way above anything else out there in energy-related securities. Be patient here, and we'll expect some cold weather to breathe some life back into the group.
If you don't own these stocks and you want to buy this pullback, I would consider the two higher-quality stocks Penn West Energy (PWE) and Provident Energy (PVX). They have very low payout ratios, which means they should have no trouble maintaining, or perhaps increasing, their dividends. They have little or no leverage and are the institutional favorites when that kind of money comes back into the sector. At current prices, their yields are up more than 11%, and both are showing excellent profit growth.
Canetic Resources (CNE), Harvest Energy (HTE) and Precision Drilling (PDS) carry higher risk, due to higher payout ratios and debt on their balance sheets, so they'll definitely want to see crude prices hold at $54 per barrel and gas prices hold above $5.50 per million cubic feet. I would hold off buying new or adding to your position with either of these two stocks at this time.
The bottom line here is that we still aren't out of the woods with the Canadian royalty trusts. I believe the overall perception of the sector is improving, but we do need some firmer energy prices to help us get further out of the woods with these positions.
So, if you own or have positions in Canadian Trusts, you need to exhibit patience here as I believe that selling out at this point would be tantamount to bailing out at the bottom. I don't want to hold anything that weighs down your portfolio, but I think you will get a much better chance to lighten up on some of your Canadian exposure at better prices than we are seeing now, and some solid Q4 earnings in the coming weeks should definitely help that happen.
Stay tuned to this Blog on Tuesday, January 16, 2007. That’s when my book, The 25% Cash Machine, is available in book stores and online.
I will e-mail you with special announcement about the book on Tuesday.
Bryan
