Financial Jungle

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This is the fifth post on the Dividend Increases series.

It has only been 3 weeks since my previous dividend increases post, but I feel compelled to hurry one in as Boralex Power Income Fund just announced a distribution cut from 90 cents to 70 cents, amidst external headwinds from weaker hydrology and the declining US dollar.

In 2007, BPT.un’s $42-million net cash flow related to operating and investing activities was $9-million short of the $53-million circulated to unit holders, but management has been proactive all along warning investors about the hurdles they’re facing.

Rather than masking the problems and jeopardizing the fund’s long-term health, the new distribution policy will see payout easing to $41-million a year. This is a conservative move considering the fund still has $10-million in the bank. (i.e. the cash could’ve prolonged the current payout by another year while waiting for a turnaround.) If it were an oil & gas trust, management would’ve dug themselves deeper into the hole by (a) issuing new shares, and/or (b) borrowing debts.

Here’s my original analysis on Boralex Power Income Fund:

So why is the trust being punished? The answer likely lies in the unfavourable hydrology in the 3rd quarter. Hydrology is fickle science. Due to unusually low water level, their hydroelectric segment generated 22.8% less than historical average, even though that’s only for one quarter. It was only a year ago when the water current was exceptionally strong, while year-to-date, the segment is down only 6%.
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Since power trusts are generally considered stable and boring, coupled with Boralex’s conservative balance sheet and high ratings from S&P and DBRS, I feel the distribution is safe, and the higher yield offers a margin of safety in a rare event of a distribution cut.

Obviously I was wrong about the payout being safe. Despite the relaxed distribution policy, BPT.un is still yielding an attractive 11+% based on my average purchase price, and I see the distribution chugging back up as hydrology restores to their historical average. Although I don’t think we’ll see 90 cents anytime soon unless the US Dollar is making a come back.

Disclaimer: I’m not a professional investor. It’s vital that investors perform their own due diligent, and invest accordingly.

On a brighter note, here are my dividend increases over the past 3 weeks:

• Great West - 6.4% (14% from last year)
• IGM Financial - 5.9% (13.4% from last year)
• 3M - 4.2% (4.2% from last year) More analyses from Money Gardener and Middle Class Millionaire.

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