worthy wrote: cherry-picking
So trust distributions perform better in a time of low interest rates with rising commodity prices than common stock dividends?
Well, royalty trusts certainly tie their distributions to the price of oil and gas. Business trusts can more easily do the accretive acquistion shuffle when rates are lowish. And REITS can increase rents on renewals when they have full occupancy. During the recession in the early 90s, Riocan cuts its distribution from $1 in 1990 to .65 in 91 to .525 in 92 to .34 in 93 before increasing to .46 in 94. ISTM that trusts are very prone to cyclical distribution patterns. Regular stock dividends for most companies aren't as dependent on cycles. The rate of increase may slow but the dividend doesn't often get cut or even more rarely, eliminated. They make distributions that are more sustainable over time. They use share buybacks to smooth dividend payouts and soakup excess cash rather than increase a dividend unsustainably.
For Scotia to say "that certain trusts indeed have the potential for substantial organic or acquisitive growth" when the measuring period is 4 years is cherry picking.
Arby wrote:Also, most Business Trusts would not derive any benefit from the rise in commodity prices.
I didn't say they would. When business trusts increase their payouts through the accretive acquistion exercise, it's because they are able to find assets that have a return higher than the cost of financing. With lowish interest rates, that hurdle is easier to jump. As rates rise, the pool of available assets decreases and the cost of debt servicing increases.
Does anyone have a copy of the Scotia report?
gyrfalcon wrote:My question was: If you personally were researching Trusts for your own possible purchase, do you feel / have you found, it is / was easier to come to conclusions on RTs, or REITs, or Business Trusts ?
I quickly realized on RTs that I have to rely on what the company says about its reserves and that I was going to have to learn a great deal about the industry in order to determine whether A was better value than B was better value than C. For REITs, analysis meant that I was going to have to delve into their real estate portfolios. For business trusts, the problems were even greater. Business trusts that go the acquisition route make financial analysis difficult because you have a moving target. Trying to figure out if the distribution was conservative or aggressive is difficult because you can't tell whether the CAPEX number is being squeezed or not. It's also difficult to determine whether borrowing is leaking into distributions. My experience with the management of Superior and Home Equity Income Trust when each was internalizing the management agreement made me very leery about business trusts. I early on gave up on trying to research individual trusts and opted for the safety-in-numbers protection of trusts of trusts. As more and more flavours were offered, that route became even better. I sold the few individual trusts that I owned and bought trusts like SIN and BAI. I sold them last year because I think that most trusts are cyclical. Since market timing is a crap shoot, I preferred to err on the side of bailing early because my bias is to capital preservation/lower income rather than capital risk/higher income.
It's probable that folks might think that I'm anti-trust but I'm not. I'm critical of some of the disclosure. I'm critical of the growth assumption. But I've owned trusts (up to 10% because they are small cap) and I'd own them again towards the bottom of the business cycle when things are looking bleak. I wouldn't own them right now as we approach the top of the business cycle. I'm cautious about owning any small caps as we approach the top of the business cycle. If I were sitting on a trust with a 50% gain and a current yield of 8% that is increasingly susceptible to a distribution cut, I'd take the gain because it represents 6 years of distributions.