Tuesday, May 12, 2009

TWO MUST-HAVE CANADIAN INCOME TRUSTS FOR HIGH DIVIDEND DIVERSIFICATION:

 

Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF), CML Healthcare Income Fund (TSX: CLC-U, OTC: CMLIF)

PART 11 OF A SERIES: THE HIGH DIVIDEND INVESTOR'S COLLAPSING DOLLAR SURVIVAL GUIDE

1. INTRODUCTION: A TELECOMMUNCATIONS AND HEALTHCARE SELECTION FOR DIVERSIFICATION

There aren't many stocks in the healthcare and communications sectors that offer dividends that are reliable, high, AND in a dollar hedge. So it's exciting when you find them, because they give you some diversification into these sectors.

The two sectors share similarities.

Due to steady demand in both sectors, well run firms in these fields can prosper even in bad times due to the steady demand.

The key phrase here is "well run." While there is demand, few firms in either field have greatly prospered.

Telecom firms have seen their traditional cash cow land line monopoly businesses eroded by cable, wireless and internet competition, and only those telecoms that could grow in these competitive areas have been able to prosper.

Health care firms typically must be very efficient at processing lots of paperwork correctly (or suffer payment delays) and coping with fixed reimbursement rates.

Note: As I hope to detail in another post, I am not a believer in this rally. Thus it's a treacherous time to take new stock positions, especially given the recent run up of these and other recommendations in this series. Do not buy above the limits stated below, and even then take only partial positions unless we revisit the March lows.

2. Bell Aliant Regional Communications Income Fund

Bell Aliant Regional Communications Income Fund (OTC: BLIAF, TSX: BA-U ). Given the dubious nature of the current rally and the very thin daily volume traded on this stock (and thus extra potential for volatility), buy only on dips below 19. Yield over 11%.

BLIAF had strong Q1 results. Like any telecom that is prospering in the era of increased competition to their landline businesses, they're growing income from Internet and other advanced services to more than compensate for the steady decline in revenues from traditional local and long distance landline phone operations.

Highlights include:

· Conservative Payout Ratio: Distributable cash flow again easily covered distributions with a payout ratio of 83 percent, despite a 13 percent increase in capital spending to upgrade the network for faster services.

· Tighter Business Focus, Improved Cash Position: The trust also completed the sale of its Defense oriented unit, focusing operations and boosting the balance sheet with proceeds of CAD16 million now, to be followed by CAD8.5 million later in the year.

· Cost Cutting: Resulting in rising margins during the quarter even as overall revenue slipped 1.2 percent. Internet revenue grew 10.8 percent on 8.6 percent customer growth and a 5.4 percent increase in revenue per user, as the trust’s data business continued to grow.

· No Debt Pressure: By nature telecoms need to make big capex investments and thus depend on a cooperative debt market. That's not the case now. Fortunately, the firm has no significant debt due until 2011, so they have time for things to improve.

In sum, this is sound business that’s prospering in the toughest market in generations. That's a reassuring sign that management is on top of its game and will continue to be able to exploit further opportunities in broadband and wireless services.

3. CML Healthcare Income Fund

CML Healthcare Income Fund (OTC: CMHIF, TSX: CLC-U). Yield over 7%. Buy under 11. Yield over 7%.

While Canada's health care system is far more socialized than that of the US, it's still possible for well managed, efficient companies and trusts to profit in Canada’s health care system. In fact, given Canada's traditionally more paternal the government commitment to funding the system, business is actually even steadier than in the US, making healthcare one of the most reliable sectors.

Reliable high yields in healthcare are very hard to find, and this is the best I've seen. It provides testing services and has begun expanding into the US. They reported first quarter revenue growth of 38.6 percent and double-digit cash flow growth, which in turn drove its payout ratio down to a comfortable 84.6 percent.

The keys to success:

· Successful US expansion,

· Steady income from current operations

· Rate increases at the Canadian operations

· New cost controls

These trends should continue to show up on the bottom line for the rest of the year, even as the trust boosts efficiency by digitizing its information network. A veteran player in Canada’s national medical industry, CML is well positioned to profit richly from President Obama’s moves to increase the government role in the US. As an established player, it has the financial strength to make that happen as opportunities arise.

4. CONCLUSION

My only reservations about buying these firms are:

· Both are above my buy limits as of the time of this writing

· Both are thinly traded and thus potentially volatile

· There is plenty of overall market risk given both

ü The likely fraudulent and one-time nature of the Q1 profits that ignited this rally

ü The lack of fundamental (versus technical unwinding of short positions) underlying justification for the rally's continuation

Thus keep these in mind when their prices come in.

Disclosure: The author owns shares in the above companies.

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