The other day I stumbled across a couple of funds that trade in Canada that on the surface are quite intriguing.Candidly my second thought is that I am missing something here and that I should stay away.
It might be right to think of this space as one of my blindspots.
The chart is of something called the Algonquin Power and Income Fund which trades in Canada under ticker APF-UN.TO and on the pinks here with AGQNF. Algonquin has four segments; Hydro Electric 31% of 2006 revenue, Co-generation 28%, Alternative Fuels 21% and Infrastructure, which is mostly water, 20%. The 2007 annual report is not out yet but I believe the revenue mix will be noticeably different.
It pays a very large dividend of C$0.0766, which works out to C$0.92 per year which is more than a 12% yield. They do make enough to cover the dividend. In reading the 3Q 2007 report they have had some revenue issues due to having operations in the US and being domiciled in Canada (currency issues).
In greenback terms the fund made a high of $9.42 on October 17 so it is down 25%. Over the last year it is down a more reasonable 3.3%. For the period charted, which is as far as Yahoo goes back (maybe that is when the fund listed?) it is down 19%.
The lines of business they are in, the potentially non-cyclical nature of those businesses, the future need for more things like hydro electric and alternative fuels, the yield and what has been a low correlation to the S&P 500 make the concept intriguing but something seems off.
If the price could have kept up with the dividend I might feel differently. Flat with a big yield is potentially a winning combination when blended in to a diversified portfolio but so far it has been a let down on the flat part.
I have questions, I called the fund and left a voice mail for someone, said I was from theStreet.com because I would like to write an article about the fund but it has been a few days now with no call back.
If anyone knows more about the fund please leave what you know in the comments. I looked at a couple of other similar funds (more focused on the hydro electric than a diverse business) and most of those look to be worse than this one. The one that I found that has done better is Great Lakes Hydro (GLHIF.PK) which yields a less scary 7.1%. I'll try to do a little more digging on this one to see what I can see and will let you know.
From a slightly bigger macro if demand for regular stocks stays lousy for a while these funds are the sort of thing that could be a great place to hide out in until demand for equities gets healthy again. To be clear I am not suggesting these funds in any shape or form, I still have a lot more to learn about them.
18 comments:
Along the lines of the Canadian Energy theme, do you have any thoughts on the Canadian Energy Income ETF released by Claymore (ENY)?
I haven't looked into many of the names held inside the ETF but I would be curious to know how much of that revenue comes from things like hydro electric, etc. (anything other than oil and oil sands basically)
ENY is a combo of oil sands and royalty trusts not, as I understand it, hydro funds.
a quick scan of the holdings and I do not see any hydro names, can't guarantee that i'm not missing one but it appears there are no hydro names.
A fund that I owned for a while and did well with (sold too early) is riding the agriculture wave,
AFN-UN.TO AG GROWTH INCOME FD. Trades on pink sheets as AGGRF. Always hard to find out much on many of these canadian stocks and trading on pink sheets not alot of fun.Also the Canadian tax policies turned me off. So now I stay away from Canada directly.
ron
http://finance.yahoo.com/q/bc?t=1y&s=AFN-UN.TO&l=on&z=m&q=l&c=aggrf.pk
I think you are correct. After looking at 15 or so of the names in the fund I cannot find a single one that does not simply have exposure to oil and nat. gas.
Brookfield Power made a little less money with their hydroelectric plants in 2007 than 2006 due to low water levels caused by drought. The upside to hydro is your fuel - water - is free. The downside is it might not rain for six months. Maybe that was the problem with Algonquin.
Been long this puppy for about 1.5 years. They got hammered on the Canadian tax law changes (which will occur in the next couple of years) and also were in a bidding war with Macq Power and Infrastructure (MPT.UN which yields 12.5%) over a generation company (the name eludes me) and lost. The stock never recovered. They pay monthly.
They have had some ok reviews by the Globe and Mail.
12.9% yield is not too unusual for a Canadian Trust. Some very large trusts pay more than this. The yield has come back on these trusts and reits since the bad news on taxation.
The stock is stinking up the joint as of late and don't know why I haven't sold.
Look at KHD.to (no yield though) for a pure hydro play. MPT.UN is into some weirder stuff.
Hope that helps.
dnf
dnf,
i forgot but the Algonquin Roundtable (some of their reporting actually) talked the taxation issues.
As far as KHD, I found that one, find it very interesting but did not mention it as it is (as you say) a different type of security.
To be clear I am just interested in learning more about KHD, no position.
Should have said I was also long KHD.to also. Held it for about a year. Traded in and out. Bought it as a takeover play after Maq bought out Clean Power Income fund (I knew I would remember eventually). Clean Power was great. Read KHD annual and they look good. Been buying up some wind properties around the country (Canada that is). I am staying long for the potential takeover, the chance of a future dividend, and the greenie/oil wave.
Keep up the good work Roger.
dnf
Roger, try dividendyieldhunter.com and click on Canadian Income Trusts. You'll pull up a list of names involved in water, utility, and telecom. I generally avoid trusts and MLPs since I invest thru a tax-deferred account, so I haven't got the foggiest idea what you may find here! Hopefully helpful, maybe not.
Roger:
I was researching Great Lakes Power Income Fund last night. I have owned Peyto in the past, and now own Norsk Hydro. I've learned from both holdings that thin trading and Pinksheets will result in high volatility( frequently up to 5% in a day). Please let us know what you think about Great Lakes. I was following your same logic ( currency hedge, hydroelectric, income) when I found Great Lakes on a search in google for hydroelectric companies. I was going to read their annual reports and filings today. The webpage indicated some properties in New England. Think I'll wait for your take on it now. thanks for sharing your thoughts.
Sam
but it trades almost 33000 shares in canada on a daily basis.
joke
liquidity is an issue if i try to buy across the board for clients.
others might disagree but if buying something as long term hold, i don;t think that it moving a lot intraday because of some one placing a large trade is a real issue.
but that migh just be me.
Sorry, but this stock is a stinker. There are so many other royalty trusts out there that pay high dividends, are liquid, and have appreciated substantially in price. I outlined some of these in my Feb. 19th blog. At the time, my faves were Permian Basin and BP Prudhoe Bay. It's interesting that Cramer finally caught onto these and featured both on March 5th. Since I mentioned them, Permian has risen over 14% and BP Prudhoe 9%. They both have great dividend yields: 10.5% for Permian and 13.2% for BP. Royalty trusts are good additions to tax-sheltered accounts.
Dr. Kris
www.stockmarketcookbook.blogspot.com
My gut reaction, when the yield of the S&P 500 is 2%, is that any 12% yield is probably too good to be true.
To Jody,
The high yield on the Canadian Trusts is a function of the tax structure under which they operate, similar to REITs here (by paying the bulk of earnings out as dividends, escaping taxes at the coporate level). As with REITs, a problem can arise because growth requires issuance of new shares, causing potential dilution to existing shareholders.
In any case, the tax law is scheduled to change up North, although the jury is still out, as to whether the proposal will remain unchanged (most current trusts are operating under a "grandfather clause", giving them until 2011 to maintain existing structure).
Full disclosure: 2 Canroys (PGH and PVX in portfolio)
Jan
Hi Jan,
Well, the yield is as much a function of *price* as it is the dividend. Any dividend-paying security can theoretically achieve a 12% yield if the price falls far enough. Conversely, even a large dividend can result in a mediocre yield if stock price *rises* far enough. In fact, the REIT bull market resulted in ~3% yields at the peak in early 2007, and REITs are still sporting unimpressive ~4.5% yields today.
So my question then is why have prices fallen in this case? If Canadian trusts are financially similar to REITs, then I would have expected a parallel bull market there driven by investors looking for high yields.
Hi Jody,
The price drop, in all likelihood, was because of the tax change legislation (pretty much all of the income trusts got mauled, because it was an unexpected change by the Conservative gov.)
Jan
You might wish to check Stockchase.com for information about Canadian stocks.
What will happen to all the income trusts in 2011 when the proposed legislation kicks in? Will we see a sudden drop in prices as the income trusts lower yields? Or has the market already corrected for the upcoming tax change?
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