In this issue:

Published July 4, 2012

Next issue: July 25

INCOME INVESTORS DO WELL

By Gordon Pape, Editor and Publisher

It was not a good first half for Canadian stocks generally. The S&P/TSX Composite Index ended the first six months of 2012 with a loss of 3% and that would have been much worse had it not been for a big rally on the last trading day of June.

The good news is that income investors did better than the overall index, in some cases much better. Here’s a rundown of how the key income sub-indexes performed.

S&P/TSX Capped REIT Index. Real estate investment trusts continued their winning streak in the first half, posting a gain of 8.7%. Among the top performers was Allied Properties REIT which was recommended by contributing editor Gavin Graham in May. It finished the first half at $29, close to its 52-week high, and was showing a six-month gain of 17.3% at that stage, according to Morningstar.ca. Other REITs on our Recommended List that beat the index in the first half were Boardwalk (+18%), Northern Property (+13.8%), and Primaris (+17.3%).

S&P/TSX Income Trust Index. Although there are only a few income trusts left, this sub-index still exists and was ahead 6.7% in the first half. Unfortunately, most of the components are REITs which already have their own index. Some of trusts and limited partnerships on our Recommended List are not included, such as Brookfield Renewable Energy LP, Chemtrade Logistics Income Fund, and The Keg Royalties Income Fund. One that is there, Inter Pipeline Fund, is up 5.9% so far in 2012. S&P should revise this index to eliminate the REIT overlap or dump it.

S&P/TSX Canadian Dividend Aristocrats Index. This is composed of companies that have increased their dividends for at least five consecutive years. The index was ahead 0.2% in the first half, not a great return but much better than the Composite. Among the components of this index that are on our Recommended List, we saw good performances from Cineplex (+21.6%), Intact Financial (+9.7%), Canadian Utilities (+9.4%), CN Rail (+8.4%), and Enbridge (+8.2%).

S&P/TSX Preferred Share Index. Preferred shares were actually down a fraction (-0.4%) in the first half but managed to outperform the Composite Index nonetheless. The Bank of Nova Scotia Series O preferreds that we recommended last December were ahead 2.2% in the first half, beating the peer group. The BCE Series S issue, which was added to our Recommended List in February, gained slightly more than 3%.

The results so far this year prove once again that a focus on dividend-paying securities pays off even during a turbulent period when the broader markets are losing ground.

 

Gordon Pape’s new book, Retirement’s Harsh New Realities, can be purchased through our on-line Best Books store, which is associated with Amazon: http://astore.amazon.ca/buildicaquizm-20. It is also available in e-book formats for Kindle, Kobo, and other readers.

Return to the table of contents…

UPDATES

Here are the updates for this issue. All prices are as of the close of trading on Tuesday, July 3 unless otherwise indicated.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP)

Type: Offshore limited partnership
Trading symbol: BIP.UN, BIP
Exchange: TSX, NYSE
Current price: C$34.25, US$34.04
Originally recommended: Sept. 16/10 at C$18.90, US$18.38
Risk Rating: Moderate risk
Recommended by: Gordon Pape
Website: www.brookfieldinfrastructure.com

Comments: This Bermuda-based infrastructure limited partnership reported first-quarter results in May and they were not as impressive as in the past.

Funds from operations (FFO) rose by $10 million year-over-year to $108 million (figures in U.S. currency). But on a per share basis, FFO dropped from $0.62 in 2011 to $0.58 this year. The reason was an increase in the number of units outstanding as a result of a new issue last October, proceeds of which were used to finance the expansion of the partnership’s Australian railroad. This will pay off in the long run but the immediate impact has been to dilute returns to unitholders. Net income also declined from $45 million ($0.29 per unit) last year to just $14 million ($0.08 per unit) in 2012.

The LP increased its distribution by 7% in February to US$0.375 per unit ($1.50 a year). With the price of the shares continuing to rise (it is up by almost $3 since my last review in April), the yield has dropped to 4.4%.

This has been an excellent performer for us but the shares are looking a little pricey at current levels. So we are changing our guidance to Hold for now. If the price pulls back to below $32, consider adding to your position.

Action now: Hold. – G.P.

 

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Reitmans (Canada) Ltd. (TSX: RET.A , OTC: RTMAF)

Type: Common stock
Trading symbol: RET.A, RTMAF
Exchange: TSX, Grey Market
Current price: C$12.25, US$11.92 (June 27)
Originally recommended: April 28/10 at C$18.65, US$18.51
Risk Rating: Moderate risk
Recommended by: Gordon Pape
Website: www.reitmans.ca

Comments: Reitmans stock hit the skids after the company released an unexpectedly weak quarterly report on May 29. For the three months to April 28, the retailer said sales declined 1% on a year-over-year basis to $217 million. Management blamed the drop on “a difficult retail environment marked by increased promotional activity” and suggested that higher prices for food and gasoline were also factors because they reduced disposable income available for clothing purchases. Reitmans reported a small loss of $53,000 for the quarter compared to a profit of $624,000 the year before.

The poor results may have contributed to a contraction in the company’s retailing network in the quarter. A total of 33 stores were closed and only 16 new ones added for a net loss of 17 outlets. Over the past 12 months, the company has closed a net total of 40 stores.

Despite the worsening situation, the board of directors approved a quarterly dividend of $0.20 a share which will be paid on July 26 to shareholders of record as of July 12.

On the positive side, the company announced a significant new strategic partnership. Its Thyme Maternity line of apparel and accessories will now be offered in 160 Babies R Us locations in the U.S., expanding an arrangement that was already in place in Canada.

Action now: Hold. – G.P.

 

Return to the table of contents…

First Capital Realty (TSX: FCR, OTC: FCRGF)

Type: Common Stock
Trading symbol: FCR, FCRGF
Exchange: TSX, Grey Market
Current price: C$18.40, US$17.92 (June 27)
Originally recommended: Jan. 20/05 at C$11.97 (split-adjusted)
Risk Rating: Higher risk
Recommended by: Gordon Pape
Website: www.firstcapitalrealty.ca

Comments: First Capital has benefitted from the same investor support that has buoyed the REITs so far this year, gaining 8.4% in the first half. The company turned in a good first quarter, reporting funds from operations (FFO) of $44.4 million ($0.25 per share) compared to $39.3 million ($0.24 a share) for the same period last year. Net income attributable to common shareholders more than doubled to $99.1 million ($0.52 a share) from $48.4 million ($0.28 a share) in 2011.

The company, which specializes in supermarket and drugstore anchored neighbourhood and community shopping centres, continues to expand. During the quarter, it acquired four properties and land sites adjacent to existing shopping centres, one new development land parcel, and three development land parcels in existing assemblies, adding 59,000 square feet of gross leasable area and 3.6 acres of land for future development.

CEO Dori Segal says to expect more of the same: “In the next twelve months we will remain focused on completing a large number of development, redevelopment and expansion projects financed mainly through the recycling of capital, and in addition expanding our urban mixed-use activities.”

The main negative from an investor perspective is the fact the dividend has been stuck at $0.20 per quarter ($0.80 annually) since 2007. As a result, the yield has steadily declined as the share price has moved higher. When we last updated the stock in August 2011 it was trading at $15.53 and yielding 5.2%. At the current price of $18.40, the yield is down to 4.3%. The capital gain we have received in the interim is nice, but a dividend increase is overdue.

Action now: Hold.

Return to the table of contents…

WEBSITE DELETIONS

The following securities have been deleted from our on-line Recommended List. Sell advisories were previously published in the newsletter so this notice is for record-keeping purposes only.

Canada 4.25% Dec. 1/21 Real Return Bonds. Originally recommended by Tom Slee on Aug. 19/04 at $166.41. Sold Nov. 23/11 at $207.27.

Greater Toronto Airport Authority 6.25% Notes. Originally recommended by Tom Slee on Dec. 15/04 at $109.60. Sold July 21/10 at $106.60.

Colabor Group Inc. (TSX: GCL, OTC: COLFF) Originally recommended by Gordon Pape on March 25/09 at $8.95. Sold Oct. 27/10 at $10.93.

Crescent Point Energy (TSX: CPG, OTC: CSCTF). Originally recommended by Gordon Pape on March 25/09 at $26.72. Sold Aug. 10/11 at $40.53.

 

Return to the table of contents…

That’s all for this issue of Update Edition. Look for your next regular issue of The Income Investor on July 25.

Best regards,
Gordon Pape, editor-in-chief

In this issue:

Published July 4, 2012

Next issue: July 25

INCOME INVESTORS DO WELL

By Gordon Pape, Editor and Publisher

It was not a good first half for Canadian stocks generally. The S&P/TSX Composite Index ended the first six months of 2012 with a loss of 3% and that would have been much worse had it not been for a big rally on the last trading day of June.

The good news is that income investors did better than the overall index, in some cases much better. Here’s a rundown of how the key income sub-indexes performed.

S&P/TSX Capped REIT Index. Real estate investment trusts continued their winning streak in the first half, posting a gain of 8.7%. Among the top performers was Allied Properties REIT which was recommended by contributing editor Gavin Graham in May. It finished the first half at $29, close to its 52-week high, and was showing a six-month gain of 17.3% at that stage, according to Morningstar.ca. Other REITs on our Recommended List that beat the index in the first half were Boardwalk (+18%), Northern Property (+13.8%), and Primaris (+17.3%).

S&P/TSX Income Trust Index. Although there are only a few income trusts left, this sub-index still exists and was ahead 6.7% in the first half. Unfortunately, most of the components are REITs which already have their own index. Some of trusts and limited partnerships on our Recommended List are not included, such as Brookfield Renewable Energy LP, Chemtrade Logistics Income Fund, and The Keg Royalties Income Fund. One that is there, Inter Pipeline Fund, is up 5.9% so far in 2012. S&P should revise this index to eliminate the REIT overlap or dump it.

S&P/TSX Canadian Dividend Aristocrats Index. This is composed of companies that have increased their dividends for at least five consecutive years. The index was ahead 0.2% in the first half, not a great return but much better than the Composite. Among the components of this index that are on our Recommended List, we saw good performances from Cineplex (+21.6%), Intact Financial (+9.7%), Canadian Utilities (+9.4%), CN Rail (+8.4%), and Enbridge (+8.2%).

S&P/TSX Preferred Share Index. Preferred shares were actually down a fraction (-0.4%) in the first half but managed to outperform the Composite Index nonetheless. The Bank of Nova Scotia Series O preferreds that we recommended last December were ahead 2.2% in the first half, beating the peer group. The BCE Series S issue, which was added to our Recommended List in February, gained slightly more than 3%.

The results so far this year prove once again that a focus on dividend-paying securities pays off even during a turbulent period when the broader markets are losing ground.

 

Gordon Pape’s new book, Retirement’s Harsh New Realities, can be purchased through our on-line Best Books store, which is associated with Amazon: http://astore.amazon.ca/buildicaquizm-20. It is also available in e-book formats for Kindle, Kobo, and other readers.

Return to the table of contents…

UPDATES

Here are the updates for this issue. All prices are as of the close of trading on Tuesday, July 3 unless otherwise indicated.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP)

Type: Offshore limited partnership
Trading symbol: BIP.UN, BIP
Exchange: TSX, NYSE
Current price: C$34.25, US$34.04
Originally recommended: Sept. 16/10 at C$18.90, US$18.38
Risk Rating: Moderate risk
Recommended by: Gordon Pape
Website: www.brookfieldinfrastructure.com

Comments: This Bermuda-based infrastructure limited partnership reported first-quarter results in May and they were not as impressive as in the past.

Funds from operations (FFO) rose by $10 million year-over-year to $108 million (figures in U.S. currency). But on a per share basis, FFO dropped from $0.62 in 2011 to $0.58 this year. The reason was an increase in the number of units outstanding as a result of a new issue last October, proceeds of which were used to finance the expansion of the partnership’s Australian railroad. This will pay off in the long run but the immediate impact has been to dilute returns to unitholders. Net income also declined from $45 million ($0.29 per unit) last year to just $14 million ($0.08 per unit) in 2012.

The LP increased its distribution by 7% in February to US$0.375 per unit ($1.50 a year). With the price of the shares continuing to rise (it is up by almost $3 since my last review in April), the yield has dropped to 4.4%.

This has been an excellent performer for us but the shares are looking a little pricey at current levels. So we are changing our guidance to Hold for now. If the price pulls back to below $32, consider adding to your position.

Action now: Hold. – G.P.

 

Return to the table of contents…

Reitmans (Canada) Ltd. (TSX: RET.A , OTC: RTMAF)

Type: Common stock
Trading symbol: RET.A, RTMAF
Exchange: TSX, Grey Market
Current price: C$12.25, US$11.92 (June 27)
Originally recommended: April 28/10 at C$18.65, US$18.51
Risk Rating: Moderate risk
Recommended by: Gordon Pape
Website: www.reitmans.ca

Comments: Reitmans stock hit the skids after the company released an unexpectedly weak quarterly report on May 29. For the three months to April 28, the retailer said sales declined 1% on a year-over-year basis to $217 million. Management blamed the drop on “a difficult retail environment marked by increased promotional activity” and suggested that higher prices for food and gasoline were also factors because they reduced disposable income available for clothing purchases. Reitmans reported a small loss of $53,000 for the quarter compared to a profit of $624,000 the year before.

The poor results may have contributed to a contraction in the company’s retailing network in the quarter. A total of 33 stores were closed and only 16 new ones added for a net loss of 17 outlets. Over the past 12 months, the company has closed a net total of 40 stores.

Despite the worsening situation, the board of directors approved a quarterly dividend of $0.20 a share which will be paid on July 26 to shareholders of record as of July 12.

On the positive side, the company announced a significant new strategic partnership. Its Thyme Maternity line of apparel and accessories will now be offered in 160 Babies R Us locations in the U.S., expanding an arrangement that was already in place in Canada.

Action now: Hold. – G.P.

 

Return to the table of contents…

First Capital Realty (TSX: FCR, OTC: FCRGF)

Type: Common Stock
Trading symbol: FCR, FCRGF
Exchange: TSX, Grey Market
Current price: C$18.40, US$17.92 (June 27)
Originally recommended: Jan. 20/05 at C$11.97 (split-adjusted)
Risk Rating: Higher risk
Recommended by: Gordon Pape
Website: www.firstcapitalrealty.ca

Comments: First Capital has benefitted from the same investor support that has buoyed the REITs so far this year, gaining 8.4% in the first half. The company turned in a good first quarter, reporting funds from operations (FFO) of $44.4 million ($0.25 per share) compared to $39.3 million ($0.24 a share) for the same period last year. Net income attributable to common shareholders more than doubled to $99.1 million ($0.52 a share) from $48.4 million ($0.28 a share) in 2011.

The company, which specializes in supermarket and drugstore anchored neighbourhood and community shopping centres, continues to expand. During the quarter, it acquired four properties and land sites adjacent to existing shopping centres, one new development land parcel, and three development land parcels in existing assemblies, adding 59,000 square feet of gross leasable area and 3.6 acres of land for future development.

CEO Dori Segal says to expect more of the same: “In the next twelve months we will remain focused on completing a large number of development, redevelopment and expansion projects financed mainly through the recycling of capital, and in addition expanding our urban mixed-use activities.”

The main negative from an investor perspective is the fact the dividend has been stuck at $0.20 per quarter ($0.80 annually) since 2007. As a result, the yield has steadily declined as the share price has moved higher. When we last updated the stock in August 2011 it was trading at $15.53 and yielding 5.2%. At the current price of $18.40, the yield is down to 4.3%. The capital gain we have received in the interim is nice, but a dividend increase is overdue.

Action now: Hold.

Return to the table of contents…

WEBSITE DELETIONS

The following securities have been deleted from our on-line Recommended List. Sell advisories were previously published in the newsletter so this notice is for record-keeping purposes only.

Canada 4.25% Dec. 1/21 Real Return Bonds. Originally recommended by Tom Slee on Aug. 19/04 at $166.41. Sold Nov. 23/11 at $207.27.

Greater Toronto Airport Authority 6.25% Notes. Originally recommended by Tom Slee on Dec. 15/04 at $109.60. Sold July 21/10 at $106.60.

Colabor Group Inc. (TSX: GCL, OTC: COLFF) Originally recommended by Gordon Pape on March 25/09 at $8.95. Sold Oct. 27/10 at $10.93.

Crescent Point Energy (TSX: CPG, OTC: CSCTF). Originally recommended by Gordon Pape on March 25/09 at $26.72. Sold Aug. 10/11 at $40.53.

 

Return to the table of contents…

That’s all for this issue of Update Edition. Look for your next regular issue of The Income Investor on July 25.

Best regards,
Gordon Pape, editor-in-chief