In this issue:

Next issue: Jan 29

WATCH THE FED IN 2015

By Gordon Pape, Editor and Publisher

Keep a close eye on Janet Yellin this year. The chair of the U.S. Federal Reserve Board will probably have a greater impact on your financial fortunes than any other public figure. And it’s not just her decisions that will have a profound impact. It’s her words as well – or the omission of them.

Consider the word “patient” for example. In its latest policy statement, issued on Dec. 19, the Fed said that based on labour market conditions and inflation expectations it can “be patient in beginning to normalize the stance of monetary policy”. That was interpreted as meaning the governors are in no rush to raise the key federal funds rate from its current target of zero to 0.25%. Stock markets rallied on the news.

But at some point, perhaps as early as the end of the first quarter, the word patient will disappear from the official statement. When that happens, expect all hell to break loose because it will be seen as a signal that higher interest rates are just around the corner.

How bad might it be? Think back to the spring of 2013 when then Fed chair Ben Bernanke talked about “tapering” the quantitative easing (QE) program. Yields spiked, knocking down bond prices. Interest-sensitive securities like REITs, utilities, and telecoms were battered. Income investors were left shell-shocked.

It took several months for things to get back on an even keel, even though it quickly became apparent that Mr. Bernanke’s comments were premature and that the Fed had no intention of raising interest rates any time soon. If a false alarm could spook the markets so much, imagine the effect of the real thing. Well, it’s coming so get ready.

How do you do that? Here are my suggestions.

1. Avoid long-term bonds. They did surprisingly well in 2014 but when interest rates start to rise they will be the most vulnerable to capital losses. Don’t abandon fixed-income securities because of the portfolio stability they provide but stay with short to medium term issues or funds that invest in them.

2. Buy U.S. dollar securities. The Bank of Canada will likely hold off on raising interest rates for a couple of reasons. First, the plunge in the price of oil will reduce the rate of inflation growth and negatively impact our GDP. Second, if the Fed moves first it will put more downward pressure on the Canadian dollar, which in turn will boost our export industries. A drop in the loonie will add to your profits in U.S. dollar securities, whether stocks or bonds.

3. Focus on quality dividend stocks. High-yield securities will be especially vulnerable to any interest-based market correction. Blue-chip stocks such as the banks should be less affected. In fact, higher interest rates are positive for the banks because they can increase the profit-making spreads on the loan rates they charge and the payouts they offer on deposit accounts and GICs.

4. Lighten up on REITs. They will likely be hit especially hard because they face a double whammy. Higher bond yields will force REIT yields higher to maintain the risk premium, which means share prices will drop. At the same time, higher rates will add to the interest cost of the debt load that REITs carry on their properties.

The timing of this remains uncertain but given the strength of the U.S. economy some economists suggest we could start to see changes in the Fed’s stance by mid-year and perhaps sooner. Personally, I think it will be closer to year-end, but it’s best to be prepared. Check over your portfolio now and, if changes are indicated, start to implement them.

 

Return to the table of contents…

THE BEST OF 2014

The goal of The Income Investor is to recommend securities that offer above-average cash flow with a reasonable level of risk. However, income and capital gains are not always incompatible and sometimes we can be pleasantly surprised. Here are some of the big winners of 2014, drawn from our Recommended List. Prices are as of the close of trading on Dec. 31.

Tim Hortons (TSX, NYSE: THI). There’s nothing like a takeover to provide a quick capital gain. That’s what happened here when Burger King agreed to merge with Canada’s iconic coffee and donut franchise on Aug. 26 in a deal valued at $12.5 billion. In the issue of Aug. 28, we advised readers to sell if they had any concerns the deal might be rejected by the Canadian government; otherwise contributing editor Gavin Graham advised holding. The stock opened the year on the TSX at $61.99 and was trading at $88.71 at the time the advice was published, up 43% for the year. The deal was completed in mid-December and the last closing price for Tim Hortons shares was $99. That was a year-to-date gain of 60% for those who held on. The merged company now operates under the name Restaurant Brands International. The stock trades on Toronto and New York under the symbol QSR.

Brookfield Renewable Energy Partners (TSX: BEP.UN, NYSE: BEP). The two Brookfield limited partnerships on our Recommended List both had good years. Brookfield Infrastructure LP (TSX: BIP.UN, NYSE: BIP) scored a capital gain of 16.8% but its younger sibling, which added almost 29% in 2014, eclipsed it. Renewable Energy operates one of the largest publicly-traded, pure-play renewable power platforms globally. Its portfolio is primarily hydroelectric and totals over 6,700 megawatts of installed capacity in the United States, Canada, Brazil, the Republic of Ireland, and Northern Ireland. The LP generates enough electricity from renewable resources to power more than three million homes on average each year. Both LPs announced significant dividend increases during the year, with more hikes expected shortly.

Enbridge Inc. (TSX, NYSE: ENB). You don’t have to invest in high-risk stocks to get a combination of good cash flow and capital gains. Enbridge is the classic example of a blue chip that offers both. Ever since retired contributing editor Tom Slee recommended it in November 2006 at $19.58 (TSX price) the shares have delivered both increasing dividends and price appreciation. The stock opened 2014 on the TSX at $46.41 and finished on Dec. 31 at $59.74 for an advance of 28.7% over the 12 months. To sweeten the pot further, the company announced a dividend increase of 33% in early December. If you don’t own shares you need to ask yourself why not.

DH Corporation (TSX: DH, OTC: DHIFF). Building a great company on an exciting new technology (e.g. Apple) creates a compelling success story. Rebuilding an old company with an outmoded business model is much less glamorous but can be just as profitable to investors who believe. That’s what the management team at DH has achieved. For decades, this company made its profits primarily from printing cheques for businesses and individuals. But as electronic banking took hold, the demand for paper cheques collapsed. DH, then known as Davis + Henderson, looked like a candidate for the scrap heap. But through a series of successful acquisitions, the company has transformed itself into a provider of electronic financial solutions to the Canadian and U.S. mortgage and finance industry. The shares pay a quarterly dividend of $0.32 ($1.28 a year) and the stock gained 23.1% in 2014. The shares were originally recommended by contributing editor Gavin Graham in October 2007.

Ag Growth International (TSX: AFN, OTC: AGGZF). This manufacturer of agricultural equipment was originally recommended by Gavin Graham in December 2009. Since then it has taken readers on a roller coaster ride, falling below $30 on a couple of occasions but bouncing back each time. Last year was a positive one for the stock, which rose from $44.65 at the beginning of January to finish at $56.51, for a gain of 21%. Investors also benefit from a healthy dividend of $0.20 a month ($2.40 a year). – G.P.

Return to the table of contents…

JANUARY UPDATES

Here are the updates for this issue. All prices are as of the close of trading on Friday, Jan. 9 unless otherwise indicated.

TransAlta Renewables Inc. (TSX: RNW, OTC: TRSWF)

Type: Common stock
Trading symbols: RNW, TRSWF
Exchanges: TSX, Grey Market
Current price: C$11.84, US$9.88
Originally recommended: Nov. 13/14 at C$12.12, US$10.95
Annual payout: $0.77
Yield: 6.5% 
Risk Rating: Higher risk 
Recommended by: Gordon Pape
Website: www.transaltarenewables.com

Comments: TransAlta Renewables is mainly a wind power company (at least for now) but its price slipped as oil dropped. Investors’ reasoning seemed to be that cheap oil would make more expensive wind power even less attractive. There’s some logic in that however government subsidies for alternative power work to offset that concern.

There has been no change in the company’s underlying fundamentals, which I described when I made the recommendation last fall. However, the price pullback means the yield is up to 6.5%, making the shares even more attractive for those willing to assume some risk.

Action now: Buy. – G.P.

 

Return to the table of contents…

Milestone Apartments REIT (TSX: MST.UN, OTC: MSTUF)

Type: Real estate investment trust
Trading symbols: MST.UN, MSTUF
Exchange: TSX, Pink Sheets
Current price: C$12.25, US$10.38 (Jan. 8)
Originally recommended: Sept. 25/14 at C$10.81, US$10
Annual payout: $0.65
Yield: 5.3%
Risk Rating: Moderate risk
Recommended by: Gordon Pape
Website: www.milestonereit.com

Comments: We’ve seen a nice move up in Milestone’s price, thanks in large part to the fact that all its assets are in the U.S. and the value of the American dollar has risen sharply against the loonie. A good third-quarter financial report didn’t hurt either.

For the period to Sept. 30, the REIT had net operating income (NOI) of $24.3 million (figures in U.S. currency), up 20.3% from $20.2 million in the same period of 2013. Adjusted funds from operations (AFFO) was $11.8 million ($0.21 per unit) compared to $9.5 million ($0.19 per unit) in the prior year. The AFFO payout ratio was 71%, down from 82% in the third quarter of 2013.

The REIT continues to grow by acquisition. During the quarter it completed the purchase of Legacy Heights, a 384-unit multifamily apartment community located in the Westminster submarket of Denver, Colorado, for a purchase price of $50.3 million.

More recently, Milestone bought Villas at Shadow Creek, a 560-unit multifamily apartment community in the Pearland submarket of Houston, Texas. The price was $74 million.

“The fundamentals in our U.S. Sunbelt markets remain attractive with population and employment trends outperforming U.S. national averages. Further, Milestone’s asset class continues to exhibit the strongest demand and rent growth trends among all multifamily residential asset classes in the U.S.,” said CEO Robert Landin.

The shares pay a monthly distribution of C$0.05417 (C$0.65 per year) to yield 5.3% at the current price.

Action now: Buy. – G.P.

 

Return to the table of contents…

The Northwest Company Inc. (TSX: NWC, OTC: NWTUF)

Type: Common stock
Trading symbols: NWC, NWTUF
Exchanges: TSX, Grey Market
Current price: C$25.45, US$22.09 (Jan. 5)
Originally recommended: April 25/07 at C$18.83, US$16.65
Annual payout: $1.16
Yield: 4.6%
Risk Rating: Moderate risk
Recommended by: Gordon Pape
Website: www.northwest.ca

Comments: This modern-day descendant of the historic Northwest Company of fur traders continues to offer a combination of price stability and good cash flow. The company now operates in northern Canada, Alaska, and, uncharacteristically given its background, the Caribbean.

Results for the third quarter of fiscal 2015, which were released on Dec. 11, showed sales of $413.5 million, an improvement of 6.8% over $387.2 million in the same period of the prior year. Especially encouraging was the fact that same store sales were ahead 3.7%, excluding the foreign exchange impact.

Net earnings increased by $1 million or 5.8% to $18.4 million ($0.37 per share, fully diluted) compared to $0.36 per share last year. Higher net earnings in the International Operations and the impact of foreign exchange contributed to the improvement. Excluding the net impact of the non-comparable costs and foreign exchange, net earnings increased 6.6% compared to last year.

Action now: Buy. Stability is especially important in turbulent markets such as we are experiencing. – G.P.

 

Return to the table of contents…

Norbord Inc. (TSX: NBD, OTC: NBRXF)

Type: Common stock 
Trading symbols: NBD, NBRXF
Exchange: TSX, Pink Sheets
Current price: C$26.14, US$22.05
Originally recommended: May 30/13 at C$33.70, US$31.94
Annual payout: $2.40
Yield: 9.2 %
Risk Rating: Higher risk 
Recommended by: Gordon Pape
Website: www.norbord.com

Comments: When I last updated Norbord in August, the stock was trading in the $21 range, having fallen sharply after a weak second-quarter report. At the time, I said that I would normally advise selling given the circumstances however with the U.S. housing market gaining momentum the prospects for the company were looking better. Therefore my guidance was to hold.

It’s a good thing we did. The stock has rallied by almost 25% since then. That is still below the original recommended price but a distinct improvement over the August valuation.

The rise in the stock occurred despite another weak quarter. Third-quarter profit came in at only $5 million ($0.09 per share, fully diluted) compared to $27 million ($0.50 per share) in 2013. Sales were down to $302 million from $311 million.

Part of the third-quarter decline was due to a corporate decision to move annual maintenance shutdowns forward and to curtail production at some mills in response to weak prices for oriented strand board (OSB), Norbord’s main product.

“Despite this downtime, our mills ran very well, producing at stated capacity and holding onto manufacturing cost improvements achieved in the first half of the year. We generated $12 million in margin improvement gains so far this year and our recent capital investments are starting to pay back,” said CEO Peter Wijnbergen.

One of the reasons for the upward move in the share price was the announcement in December that the company will merge with Ainsworth Lumber to create a leading global wood products company focused on OSB production. Investors reacted positively to the news of the all-stock transaction, which will leave Brookfield Asset Management and its affiliates with a controlling interest of 53% in the merged operation. The deal is expected to close before the end of March and the combined company will operate under the Norbord name.

On the negative side, investors should brace for a dividend cut in 2015. Norbord’s dividend is set annually based on profitability and the weak 2014 results will almost certainly result in the current quarterly payment of $0.60 a share being reduced significantly.

Action now: Hold. – G.P.

 

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 Jan. 29.

Best regards,
Gordon Pape, editor-in-chief

In this issue:

Next issue: Jan 29

WATCH THE FED IN 2015

By Gordon Pape, Editor and Publisher

Keep a close eye on Janet Yellin this year. The chair of the U.S. Federal Reserve Board will probably have a greater impact on your financial fortunes than any other public figure. And it’s not just her decisions that will have a profound impact. It’s her words as well – or the omission of them.

Consider the word “patient” for example. In its latest policy statement, issued on Dec. 19, the Fed said that based on labour market conditions and inflation expectations it can “be patient in beginning to normalize the stance of monetary policy”. That was interpreted as meaning the governors are in no rush to raise the key federal funds rate from its current target of zero to 0.25%. Stock markets rallied on the news.

But at some point, perhaps as early as the end of the first quarter, the word patient will disappear from the official statement. When that happens, expect all hell to break loose because it will be seen as a signal that higher interest rates are just around the corner.

How bad might it be? Think back to the spring of 2013 when then Fed chair Ben Bernanke talked about “tapering” the quantitative easing (QE) program. Yields spiked, knocking down bond prices. Interest-sensitive securities like REITs, utilities, and telecoms were battered. Income investors were left shell-shocked.

It took several months for things to get back on an even keel, even though it quickly became apparent that Mr. Bernanke’s comments were premature and that the Fed had no intention of raising interest rates any time soon. If a false alarm could spook the markets so much, imagine the effect of the real thing. Well, it’s coming so get ready.

How do you do that? Here are my suggestions.

1. Avoid long-term bonds. They did surprisingly well in 2014 but when interest rates start to rise they will be the most vulnerable to capital losses. Don’t abandon fixed-income securities because of the portfolio stability they provide but stay with short to medium term issues or funds that invest in them.

2. Buy U.S. dollar securities. The Bank of Canada will likely hold off on raising interest rates for a couple of reasons. First, the plunge in the price of oil will reduce the rate of inflation growth and negatively impact our GDP. Second, if the Fed moves first it will put more downward pressure on the Canadian dollar, which in turn will boost our export industries. A drop in the loonie will add to your profits in U.S. dollar securities, whether stocks or bonds.

3. Focus on quality dividend stocks. High-yield securities will be especially vulnerable to any interest-based market correction. Blue-chip stocks such as the banks should be less affected. In fact, higher interest rates are positive for the banks because they can increase the profit-making spreads on the loan rates they charge and the payouts they offer on deposit accounts and GICs.

4. Lighten up on REITs. They will likely be hit especially hard because they face a double whammy. Higher bond yields will force REIT yields higher to maintain the risk premium, which means share prices will drop. At the same time, higher rates will add to the interest cost of the debt load that REITs carry on their properties.

The timing of this remains uncertain but given the strength of the U.S. economy some economists suggest we could start to see changes in the Fed’s stance by mid-year and perhaps sooner. Personally, I think it will be closer to year-end, but it’s best to be prepared. Check over your portfolio now and, if changes are indicated, start to implement them.

 

Return to the table of contents…

THE BEST OF 2014

The goal of The Income Investor is to recommend securities that offer above-average cash flow with a reasonable level of risk. However, income and capital gains are not always incompatible and sometimes we can be pleasantly surprised. Here are some of the big winners of 2014, drawn from our Recommended List. Prices are as of the close of trading on Dec. 31.

Tim Hortons (TSX, NYSE: THI). There’s nothing like a takeover to provide a quick capital gain. That’s what happened here when Burger King agreed to merge with Canada’s iconic coffee and donut franchise on Aug. 26 in a deal valued at $12.5 billion. In the issue of Aug. 28, we advised readers to sell if they had any concerns the deal might be rejected by the Canadian government; otherwise contributing editor Gavin Graham advised holding. The stock opened the year on the TSX at $61.99 and was trading at $88.71 at the time the advice was published, up 43% for the year. The deal was completed in mid-December and the last closing price for Tim Hortons shares was $99. That was a year-to-date gain of 60% for those who held on. The merged company now operates under the name Restaurant Brands International. The stock trades on Toronto and New York under the symbol QSR.

Brookfield Renewable Energy Partners (TSX: BEP.UN, NYSE: BEP). The two Brookfield limited partnerships on our Recommended List both had good years. Brookfield Infrastructure LP (TSX: BIP.UN, NYSE: BIP) scored a capital gain of 16.8% but its younger sibling, which added almost 29% in 2014, eclipsed it. Renewable Energy operates one of the largest publicly-traded, pure-play renewable power platforms globally. Its portfolio is primarily hydroelectric and totals over 6,700 megawatts of installed capacity in the United States, Canada, Brazil, the Republic of Ireland, and Northern Ireland. The LP generates enough electricity from renewable resources to power more than three million homes on average each year. Both LPs announced significant dividend increases during the year, with more hikes expected shortly.

Enbridge Inc. (TSX, NYSE: ENB). You don’t have to invest in high-risk stocks to get a combination of good cash flow and capital gains. Enbridge is the classic example of a blue chip that offers both. Ever since retired contributing editor Tom Slee recommended it in November 2006 at $19.58 (TSX price) the shares have delivered both increasing dividends and price appreciation. The stock opened 2014 on the TSX at $46.41 and finished on Dec. 31 at $59.74 for an advance of 28.7% over the 12 months. To sweeten the pot further, the company announced a dividend increase of 33% in early December. If you don’t own shares you need to ask yourself why not.

DH Corporation (TSX: DH, OTC: DHIFF). Building a great company on an exciting new technology (e.g. Apple) creates a compelling success story. Rebuilding an old company with an outmoded business model is much less glamorous but can be just as profitable to investors who believe. That’s what the management team at DH has achieved. For decades, this company made its profits primarily from printing cheques for businesses and individuals. But as electronic banking took hold, the demand for paper cheques collapsed. DH, then known as Davis + Henderson, looked like a candidate for the scrap heap. But through a series of successful acquisitions, the company has transformed itself into a provider of electronic financial solutions to the Canadian and U.S. mortgage and finance industry. The shares pay a quarterly dividend of $0.32 ($1.28 a year) and the stock gained 23.1% in 2014. The shares were originally recommended by contributing editor Gavin Graham in October 2007.

Ag Growth International (TSX: AFN, OTC: AGGZF). This manufacturer of agricultural equipment was originally recommended by Gavin Graham in December 2009. Since then it has taken readers on a roller coaster ride, falling below $30 on a couple of occasions but bouncing back each time. Last year was a positive one for the stock, which rose from $44.65 at the beginning of January to finish at $56.51, for a gain of 21%. Investors also benefit from a healthy dividend of $0.20 a month ($2.40 a year). – G.P.

Return to the table of contents…

JANUARY UPDATES

Here are the updates for this issue. All prices are as of the close of trading on Friday, Jan. 9 unless otherwise indicated.

TransAlta Renewables Inc. (TSX: RNW, OTC: TRSWF)

Type: Common stock
Trading symbols: RNW, TRSWF
Exchanges: TSX, Grey Market
Current price: C$11.84, US$9.88
Originally recommended: Nov. 13/14 at C$12.12, US$10.95
Annual payout: $0.77
Yield: 6.5% 
Risk Rating: Higher risk 
Recommended by: Gordon Pape
Website: www.transaltarenewables.com

Comments: TransAlta Renewables is mainly a wind power company (at least for now) but its price slipped as oil dropped. Investors’ reasoning seemed to be that cheap oil would make more expensive wind power even less attractive. There’s some logic in that however government subsidies for alternative power work to offset that concern.

There has been no change in the company’s underlying fundamentals, which I described when I made the recommendation last fall. However, the price pullback means the yield is up to 6.5%, making the shares even more attractive for those willing to assume some risk.

Action now: Buy. – G.P.

 

Return to the table of contents…

Milestone Apartments REIT (TSX: MST.UN, OTC: MSTUF)

Type: Real estate investment trust
Trading symbols: MST.UN, MSTUF
Exchange: TSX, Pink Sheets
Current price: C$12.25, US$10.38 (Jan. 8)
Originally recommended: Sept. 25/14 at C$10.81, US$10
Annual payout: $0.65
Yield: 5.3%
Risk Rating: Moderate risk
Recommended by: Gordon Pape
Website: www.milestonereit.com

Comments: We’ve seen a nice move up in Milestone’s price, thanks in large part to the fact that all its assets are in the U.S. and the value of the American dollar has risen sharply against the loonie. A good third-quarter financial report didn’t hurt either.

For the period to Sept. 30, the REIT had net operating income (NOI) of $24.3 million (figures in U.S. currency), up 20.3% from $20.2 million in the same period of 2013. Adjusted funds from operations (AFFO) was $11.8 million ($0.21 per unit) compared to $9.5 million ($0.19 per unit) in the prior year. The AFFO payout ratio was 71%, down from 82% in the third quarter of 2013.

The REIT continues to grow by acquisition. During the quarter it completed the purchase of Legacy Heights, a 384-unit multifamily apartment community located in the Westminster submarket of Denver, Colorado, for a purchase price of $50.3 million.

More recently, Milestone bought Villas at Shadow Creek, a 560-unit multifamily apartment community in the Pearland submarket of Houston, Texas. The price was $74 million.

“The fundamentals in our U.S. Sunbelt markets remain attractive with population and employment trends outperforming U.S. national averages. Further, Milestone’s asset class continues to exhibit the strongest demand and rent growth trends among all multifamily residential asset classes in the U.S.,” said CEO Robert Landin.

The shares pay a monthly distribution of C$0.05417 (C$0.65 per year) to yield 5.3% at the current price.

Action now: Buy. – G.P.

 

Return to the table of contents…

The Northwest Company Inc. (TSX: NWC, OTC: NWTUF)

Type: Common stock
Trading symbols: NWC, NWTUF
Exchanges: TSX, Grey Market
Current price: C$25.45, US$22.09 (Jan. 5)
Originally recommended: April 25/07 at C$18.83, US$16.65
Annual payout: $1.16
Yield: 4.6%
Risk Rating: Moderate risk
Recommended by: Gordon Pape
Website: www.northwest.ca

Comments: This modern-day descendant of the historic Northwest Company of fur traders continues to offer a combination of price stability and good cash flow. The company now operates in northern Canada, Alaska, and, uncharacteristically given its background, the Caribbean.

Results for the third quarter of fiscal 2015, which were released on Dec. 11, showed sales of $413.5 million, an improvement of 6.8% over $387.2 million in the same period of the prior year. Especially encouraging was the fact that same store sales were ahead 3.7%, excluding the foreign exchange impact.

Net earnings increased by $1 million or 5.8% to $18.4 million ($0.37 per share, fully diluted) compared to $0.36 per share last year. Higher net earnings in the International Operations and the impact of foreign exchange contributed to the improvement. Excluding the net impact of the non-comparable costs and foreign exchange, net earnings increased 6.6% compared to last year.

Action now: Buy. Stability is especially important in turbulent markets such as we are experiencing. – G.P.

 

Return to the table of contents…

Norbord Inc. (TSX: NBD, OTC: NBRXF)

Type: Common stock 
Trading symbols: NBD, NBRXF
Exchange: TSX, Pink Sheets
Current price: C$26.14, US$22.05
Originally recommended: May 30/13 at C$33.70, US$31.94
Annual payout: $2.40
Yield: 9.2 %
Risk Rating: Higher risk 
Recommended by: Gordon Pape
Website: www.norbord.com

Comments: When I last updated Norbord in August, the stock was trading in the $21 range, having fallen sharply after a weak second-quarter report. At the time, I said that I would normally advise selling given the circumstances however with the U.S. housing market gaining momentum the prospects for the company were looking better. Therefore my guidance was to hold.

It’s a good thing we did. The stock has rallied by almost 25% since then. That is still below the original recommended price but a distinct improvement over the August valuation.

The rise in the stock occurred despite another weak quarter. Third-quarter profit came in at only $5 million ($0.09 per share, fully diluted) compared to $27 million ($0.50 per share) in 2013. Sales were down to $302 million from $311 million.

Part of the third-quarter decline was due to a corporate decision to move annual maintenance shutdowns forward and to curtail production at some mills in response to weak prices for oriented strand board (OSB), Norbord’s main product.

“Despite this downtime, our mills ran very well, producing at stated capacity and holding onto manufacturing cost improvements achieved in the first half of the year. We generated $12 million in margin improvement gains so far this year and our recent capital investments are starting to pay back,” said CEO Peter Wijnbergen.

One of the reasons for the upward move in the share price was the announcement in December that the company will merge with Ainsworth Lumber to create a leading global wood products company focused on OSB production. Investors reacted positively to the news of the all-stock transaction, which will leave Brookfield Asset Management and its affiliates with a controlling interest of 53% in the merged operation. The deal is expected to close before the end of March and the combined company will operate under the Norbord name.

On the negative side, investors should brace for a dividend cut in 2015. Norbord’s dividend is set annually based on profitability and the weak 2014 results will almost certainly result in the current quarterly payment of $0.60 a share being reduced significantly.

Action now: Hold. – G.P.

 

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 Jan. 29.

Best regards,
Gordon Pape, editor-in-chief