Ringing in the New Year with some hello’s and goodbye’s (PACR, BWP, EXE)

Source: j9books.blogspot.com

The 2014 new year has just begun and with it are already some quick trades to be made.  We’re saying goodbye to Pacer International (PACR) and Boardwalk Pipeline Partners LP (BWP) and saying hello to Extendicare (EXE) in our income/dividend portfolio.

Pacer International (PACR)

In much the same way we made purchases in Hovanian Enterprises (HOV) to try to profit from a rebound in the US housing market, we made investments in PACR to try to profit from a rebound in the US economy overall.

Pacer is an asset-light transportation and global logistics service provider.  Huh?  Basically they transport cargo, and they’re considered “asset-light” because they don’t own the railways, trucks, containers, etc. that are used to ship the goods.  They have contracts with railways and trucking companies, and leases containers.  Generally, as the economy picks up, so does the transport business as companies need to ship more parts, raw materials, and ultimately finished products to consumers.  In fact, Fedex is commonly used as a barometer for how the economy is doing.  We just want to get ahead of the game – profiting before people are even aware that the economy is doing better.

Pacer was of interest not only because of betting on an economic recovery, but they were a turnaround candidate – having lost an exclusive contract with Union Pacific and just taking steps to replace this lost revenue.  Unfortunately, we aren’t going to see this fully play out as PACR has agreed to sell itself for $6 cash and $3 worth of XPO Logistic shares.

Boardwalk Pipeline Partners (BWP)

Found during my dividend hunting phase a few years back, BWP was an investment in natural gas pipelines – BWP basically owned pipelines and charged companies for transporting natural gas.  It then treated itself like a REIT, giving profits back to shareholders to a tune of 8.5% where it continues to be today.

However, what I did not realize is the complexity around how this company is structured – its payouts are not considered dividends and it doesn’t operate as a REIT.  Instead, it is a Master Limited Partnership (MLP) where all shareholders are part of the partnership.  Distributions made are taxed at the personal tax rate level which really doesn’t make it any different in the eyes of a Canadian than an US security paying dividends.  However, since I had BWP in my registered account, they automatically withheld tax and when I did the math, I ended up with a distribution of only half that amount.  Moreover, there’s a whole set of different US tax forms that apply to MLPs (which unsure if they applied to me since I held it in the registered account).

Anyways, while the 8.5% dividend is nice, year-end reminded me that if I decided to add this to my non-registered accounts, I’d probably have to give my dividend away to pay an accountant to figure out the additional tax implications of a MLP. Moreover, there are plenty of natural gas pipeline companies in Canada that offer a competitive dividend after this tax (of which I will find to replace BWP).  Maybe we should call this Dividend Mistake #3?

Extendicare Inc. (EXE)

Extendicare is a provider of post-acute and long-term senior care services in ~250 North American centres.  Ideally this would be a play on an ageing population and a greater need for these services as the baby boomer generation gets older but we’re going to be adding this company to our dividend portfolio for its yield (currently 6.7%).  There are certainly better options in the same industry that produce a better yield (i.e. Leisureworld – LW yielding 7.97%), but Extendicare has some short-term growth potential that we are going to hopefully take advantage of.

In April of this year, Extendicare cut their dividend from $0.07/share to $0.04/share – which caused the stock to drop nearly 35%.  Extendicare has been having trouble with its centres in the US marketplace – everything from reductions in government funding, increased expenses, increased regulation, while also fighting several wrong death /negligent lawsuits has hampered the company through 2013.  As a result, the dividend was cut to allow the US cash flow to “enhance operations, provide financial flexibility and become responsible to future changes in funding”.  The new $0.04/share dividend represents the cash flow from just the Canadian portion that the company felt comfortable providing to shareholders.  This represents 68% of Adjusted Funds From Operations (AFFO) vs. the pre-dividend cut level of 93%.  This isn’t to say the company has stopped making money – it’s basically distributing less of its available cash to save up for a rainy day (or a freezing day as the weather is currently in some US states).

Well, Extendicare also announced that there would be a strategic review for alternatives relating to the separation of the Canadian and U.S. businesses. Originally, an alternative was slated to be determined by the end of 2013 – but the company has now extended that timeline to Q1 of this year.  These alternatives include anything from selling off the US business to spinning it off into a separate entity.  In any case, this should alleviate the burden of US operations on the company and should (*fingers crossed*) increase share price and maybe even up back the dividend.  This has an eerily similar feeling to our investment in Scott’s/KeyREIT from 2013.

So the plan is add EXE to our dividend portfolio for the great yield currently – wait for what will hopefully be only a couple of months for some news on the company’s plan of action – which will hopefully cause the stock price and/or dividend to go up.  Once their plans have been announced, then we’ll make a decision on if we want to keep EXE in our dividend portfolio or switch to one of its competitors.