Roger Conrad writes two good income based newsletter: The Canadian Edge and Utility Forecaster.
In his recent interview he highlights some metrics that are used to evaluate Canadian Income trusts.
These are somewhat similar to our business trusts that invests in infrastructures, storage assets, buildings, railway, airplanes.
The metrics are:
Dividend Growth is the Ultimate Safety
Many investors including myself sometimes focus on a certain dividend cut off. Some placed it high at 8-10%.
Dividend growth rate is good because when a company is able to grow its dividends year on year, It shows a management focusing on improving dividend per share. It also improves the chances that your investment keeps up with inflation.
For payout ratios, watch the cash flow, not the conventional EPS
The usual wallstreet analyst will use a payout ratio out of earnings to evaluate dividend safety. Roger in this case advocates evaluating from a cash flow perspective, probably because these income trusts pay out nearly all their money as income, and the ability to pay depends on how much cash flow they generate.
Earnings have depreciation and amortization subtracted, which are accounting deductions not really actual deductions of cash flow.
For debt, look at near term maturities
When credit ceased up in 2008, any one that had to roll over debt had problems. They either could not get a loan or interest rates were very high.
Revenue growth for security
Here, the investor needs to evaluate how predictable the cash will grow in the current economic climate.
Since cash flow has to be predictable, if an investor thinks the business case for this income trust segment does not look bright, he should be wary.
Focus on value and beware of stock momentum
Do not buy a stock just because it has momentum. Focus on the value of the company.
Focus on how safe is the distribution
- When Permanent Renting make as much sense then Owning a Private Property - October 20, 2021
- Create A Fund to Pay Your Future Health Insurance Premiums – How much do you need? - October 17, 2021
- DBS’s Take on Property as an Investment Strategy for Singaporeans Going Forward - October 14, 2021