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Canadian Income Trusts - Our Viewpoint

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PostPosted: Sat Sep 30, 2006 6:56 am    Post subject: Canadian Income Trusts - Our Viewpoint Reply with quote

Roger Conrad, in his report on the Canadian income trusts, wrote:

My outlook and strategy for Canadian royalty and income trusts remain the same as they've been for most of this year. Energy is the straw that stirs the drink, and a near-term dip in prices would almost surely bring down share prices of virtually all trusts, including those that have nothing to do with oil and gas. A sharp drop in energy prices would also likely hurt the Canadian dollar, thereby reducing the US dollar value of trusts' share prices and dividends.

Dividends of trusts that aren't involved with energy production, however, are more durable than those paid by producers, provided they're backed by solid businesses. Low-cost, low-debt, low-payout ratio producer trusts with healthy reserve bases aren't particularly vulnerable to even a sharp near-term dip in energy prices. And there are more than a few trusts, which are cheap, that to date have been ignored by myopic yield-chasing investors.

The bottom line: Those who've built balanced portfolios of trusts that are backed by good businesses from a range of sectors will weather whatever storm we see in the near term, whether it's triggered by falling energy prices or something else. And long term, the case for much higher prices for Canadian trusts-including oil and gas producers remains intact.

When I first began writing Canadian Edge in summer 2004, my goal was to help investors make total returns of around 10 percent a year. That was based on the idea of getting an average yield of 8 to 9 percent, along with a couple percentage points of capital gains as underlying businesses became more valuable and dividends were ratcheted up.

2005 and the second half of 2004, of course, produced much richer returns, with the average Canadian Edge Portfolio share gaining 30 percent-plus last year. So far this year, the S&P Toronto Stock Exchange Composite Index is up about 10 percent, not including dividends. Much of that gain came in the summer months, as interest rates moderated and gas prices stabilized. Some of the Top 10 and Super Yielding Portfolio picks have done better than that--some worse.

As we near the end of 2006, it's time to consider once again what your goals are with the Canadian trusts in your portfolio and how realistic they are. If you're shooting for 30 percent total returns every year, you may well get them by being extremely selective and not being afraid to buy when prices fall or sell when a trust's share price gets too high.

David Fuller's view - At the Money show this morning I was interested to hear how many forecasters were calling for much lower oil prices. This had turned into a bit of a consensus by the time I left the conference. I would have given these forecasts more credence if they had been so vociferous when oil was at $80 but now that it has fallen 25% I think many are jumping on the bandwagon. In essence they are telling us that they are short. Given the upward dynamic we saw on Wednesday and support being built at $60, I believe they are incorrect.

My view: I agree with David Fuller. Oil prices will go up from now on... simply because of the supply/demand inbalance. My Chinese friends tell me that China will import a lot of oils in the future... (it doesn't show up as much in the statistics because many of them are currently imported from Africa... not included in the statistics)
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