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Who can resist a headline like that? High yields, low risk … that’s pretty much the holy grail for investors these days (well, except for those who haven’t yet given up on finding the next Google, or the next Seabridge Gold).
So what is this all about? Today I’m working with just a wee snippet from a Carla Pasternak teaser ad for her High-Yield Investing newsletter.
This is a follow-up on an ad that I wrote about back in mid-January, about Enhanced Income Securities (EIS) — at the time, she was talking about her favorite EIS, which is pretty much the only one that’s listed in the US (click here for that article if you want to catch up with the rest of the class).
Enhanced Income Securities, which is the term she apparently made up, are more commonly referred to as Income Deposit Securities … but there are several different names people have made up for these oddball securities, so that doesn’t really matter.
These ads from Pasternak have been around for a while, in dfferent forms, but this kind of market is really made for this kind of teaser ad — they promise secure yields, the partial principal protection of a bond, and the participation in possible growth of a stock. And it’s more or less true, which always helps. She was on board with these investments pretty much as soon as they started to go public in the US and recommended them at least as long ago as the Fall of 2006, and the language of her ads hasn’t changed all that dramatically since.
The securities themselves, of course, never really caught on in the US — they’ve been much more successful in Canada, where they seem to have been born, and where their similarity to the Canadian Trusts, at least in terms of monthly dividends, has perhaps helped them to seem less odd.
There is really only one US IDS left, the one that Pasternak has consistently written about in her ads for a few years now, B&G Foods (BGF). It’s priced at about $8.25 at the moment, it was consistently in the mid-teens for its first few years of existence, then ran up to near $25 in 2007 and back down again in 2008, until collapsing (like everything else, to be fair) in the second half of last year. That’s the one I wrote about in January, and you can see that writeup here if you like.
But I didn’t talk about any of the Canadian versions of these, which can also be easily owned and traded by most US investors, on the pink sheets or directly in Toronto. And as I looked at her most recent ads she included a brief teaser sentence about another of her favorites:
“I’m also bullish on a stable, well-entrenched bus manufacturer with dividends of 11.3%.”
That’s it, that’s the teaser. But thankfully, the Gumshoe and his mighty Thinkolator are on your side … this one is:
New Flyer Industries (NFI.UN in Toronto, NFYIF on the pink sheets — volume on the pinks is quite low, be careful)
This is an income trust security, or whatever you want to call it — part bond, part stock. In this case, it represents one share of New Flyer and C$5.53 worth of principal on a bond that pays a coupon of 14%.
In practice, The monthly distribution for February is C$0.0975, which, if annualized, provides a higher yield now of about 14.25% on the current share price of C$8.20 (that’s $6.57 down here on the other side of the border). The higher yield is due to falling share price since she compiled the data for the ad, I assume, the actual monthly dividend payment has not changed for at least a year.
Here’s how they described it in their latest press release announcing the distribution:
“The total distribution of C$0.0975 per IDS reflects a cash dividend of C$0.03298 per common share and an interest payment of C$0.06452 per C$5.53 principal amount of subordinated notes for the period from February 1, 2009 to February 28, 2009.”
The company is indeed a manufacturer of heavy transit buses, they do their manufacturing both in the US and in Canada. They won’t be releasing their earnings until mid-March, but they did preannounce that they’ll be seeing lower earnings than might have been expected because of currency fluctuations — probably not that surprising, given the huge recovery of the US dollar against the Canadian currency during the last six months or so. If we can think back to very different times, it was only about 18 months ago, in the height of the commodities boom, that the Loonie reached parity with the US dollar, and it actually remained near parity for quite a while before the greenback pulled ahead last Summer — the Canadian dollar is now worth something like 80 US cents, though of course that could change as quickly as I’m typing. That has undoubtedly made it hard for companies working on both sides of the border to predict their earnings and hit their numbers.
Is this the kind of thing you’re interested in buying? Well, as of their last quarterly release (for the September quarter) they did have a big backlog of orders and options, which together represented over C$3 billion — which seems like quite a bit for a company that has been recently recording revenue of just under a billion dollars a year. At the time they saw orders going up particularly from US transit fleets, so I would assume that would continue to be a key.
I don’t know the firm well, but there are some big trends that will probably impact their business. Odds are quite good that a main driver of new bus purchases is fuel efficiency, so it’s quite possible that falling diesel prices will make transit agencies order new buses with less urgency — to some extent it probably depends on the cost savings that new buses represent.
At the same time, transit agencies, including my own public transportation here in Washington, DC, are announcing cutbacks and smaller government subsidies because of local government budget crises as income and property tax receipts collapse due to the broader economic malaise.
So where will things fall for a bus manufacturer? I don’t know — I would imagine that we’ll hear some more from the company next month when they report their earnings. All I can tell you is that this income security has been touted by Carla Pasternak for some time and she’s currently “bullish” on it … and that if the company doesn’t go bankrupt, the bond portion of that income return, which represents about 2/3 of the current dividend, ought to be relatively safe.
See, even I have to use those words that are scattered through every teaser letter … “imagine,” “if,” “ought to be.” I could throw in a “maybe” and a “probably” for you, but you get the idea.
If you’re a fan or foe of these hybrid stock/bond securities, feel free to chime in with a comment below. And if you’ve ever subscribed to High-Yield Investing, click here to review it for us and let everyone know what you think of Pasternak’s newsletter.
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OTT is another US IDS. The current yield is 19.77%.
Do you have to factor in the canadian income tax on your calculation for yield, like you would on a Canroy?
From: Nick Guarino
Subject: Gold death plunge has started…
Who is this guy? Any credence?
New Flyer featured in the “Makers & Breakers” column of the latest issue of Forbes magazine.
“Buy New Flyer Industries (6.30, NFYIF.pk), a Winnipeg, Man. maker of buses for city transit systems, seems almost too good. The stock’s $0.93 (U.S.) annual dividend gives it a yield of 14.7%.
Dennis Mykytyn, at New York’s Modern Capital Management, has special insights into New Flyer’s business. Prior to becoming a hedge fund manager, he was a senior financial officer for the Metropolitan Transit Authority. “No one will buy untested buses,” say Mykytyn, recalling New York City’s disastrous 1980s experience after it purchased Grumman’s new line of Flxible buses, only to have their frames crack while traversing potholes.
By contrast, New Flyer has been making buses since 1930. Chicago’s Transit Authority, for example, recently rolled out 150 New Flyer hybrid electric buses. “In 2008 New Flyer won 64% of its tenders. They have an order backlog of $4.1 billion, up 44% from a year ago. Also, mass transit is favored by Obama’s stimulus plan,” said Mykytyn to a gathering of ValueForum.com members in February.
New Flyer’s shares (called “income deposit securities”) trade on the Toronto Exchange and on the Pink Sheets here. U.S. investors get hit with the 15% Canadian withholding tax but get that money back by claiming a foreign tax credit.”
Sorry, you’re right — I mentioned them last time I wrote about B&G, forgot about them this time around. This is Otelco, a wireline phone company in Alabama, Maine and Missouri.
Note: If putting canadian taxable shares in an IRA or 401K, I believe you can not file for canadian foreign tax back. Gumshoe, do you know? (I realize you are not giving tax advice…)
Elissa is correct. The taxes withheld by the Canadian government [I think it's 15% of all distributions] are not recoverable if you are holding these securities in an IRA or other tax-deferred account.
I have read his advertisement and I agree with him completely. I have followed Nick’s recos over the years and he has been dead-on every time. He is one of the few in the world that can see trends as they form. I have been bullish on gold since 1999 and purchased my first bullion coins at $272 per ounce. The bull market run on gold is nearing its end in my opinion. We are entering a phenomenal period of deflation and most economists and market pundants don’t believe it or see it coming. Everything is falling in price and yet we are supposed to believe that record amounts of inflation are coming our way, don’t believe it. Assets are being destroyed on a record pace all around the world. Real estate and everything that was supported by large amounts of credit are falling everyday and it isn’t over yet. Take my advise, sell your gold, sell your real estate, sell anything that is collectible and buy US treasuries and keep your assets in cash and wait to buy assets for pennies on the dollar.
This is a question of time horizon. Due to the deflationary experience (Great Depression and Japan) gained people anticipate deflation to come and to last. besides deleveraging that’s the only real reason why a lot of cash flow producing assets have gotten really cheap (and may get cheaper). Still, if you look at high quality corporate bonds there is a big jump in yields when you go out to 5, 10, 15 years. Solvency is not really the issue there – but real interest rates expectations are. At some point inflation cannot but pick up substantially and then even a now seemingly juicy nominal yield of 9-13% may not compensate for inflation. See, the logic with Treasury bonds is not convincing: The government is fighting deflation with all means and it will continue to ammass trillions in additonal debt to do so. these must all be served (not even to speak of paying them back). There are just two ways to do that going forward: Declare outright default or inflate your way out. That’s clear as daylight. there is no other option.
Now, why shall treasuries be the asset to hide – the only one that can be inflated to the hilt and which is backed by nothing but trust and hot air? If you are not leveraging it, real estate and real assets are the place to be. they will continue to have value and they will generate income. they may fall further, true, but most of the price drops have occurred or else the whole house of cards will come down – in which case treasuries aren’t worth anything, too. so if bonds, then I will rather own a corporate bond from berkshire or fairfax than a government bond. because treasuriea are the biggest ponzi scheme of them all and you risk that they will approach their true intrinsic value at about zero any time. and the gloomier your expectations for the economy and the financial markets, the sooner the government will go bk, too. I think, that’s the point that you are essentially missing.
I started the thread on Deflation on July 14th last year
http://oneguysinvestments.com/gumshoe/comments.php?DiscussionID=1244&page=1
I have been long the dollar and short the Euro for a long time. I don’t see any inflation for the next two years.
I completely agree that the government is printing massive amounts of money and creating more and more government debt, but this is years away from creating inflation. This is real simple, falling real estate and increasing unemployment cannot and I repeat cannot cause more and more money chasing fewer and fewer goods and services, which is what inflation is. We have been very programmed to accept the concept that there will always be inflation and in the long term picture I completely agree. But there are periods of time, like now, where deflation rules the economic picture. Fortunately, deflation normally does not last too long. Japan has a unique situation mainly because the Japanese government would not allow companies, mainly banks to fail and go bankrupt. This prolonged the deflation much longer than it needed to be. Remember, debt that has been accumulated has to be paid back. You can only put off the inevitable for so long. The Fed will lower long term rates to the shock of all the world. Mr. Bernacke has even publicly stated how they could keep rates low by buying their own debt and artificially lowering longer term rates. Deflation is the game afoot for now. How long it lasts is anyone’s guess. I personally have positioned myself to take advantage of gold falling in value. I believe gold is easily overpriced $200 an ounce based on supply of gold and real aggregate demand which is falling as we speak. I firmly believe that Wall Street has been keeping gold high through hedge funds and the Comex markets and have convinced the public that gold is going higher and higher. The truth is that it is about to plunge in value and way more money is made when assets fall in price than when they go up, especially if you can get the public involved and have them left holding the bag.