Green Yield from Yellow Pages

04/20/2010 12:01 am EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Canada’s dominant directory publisher has pledged a regular dividend yielding more than 10% at the current share price, writes Gordon Pape in Internet Wealth Builder.

The first quarter is now in the history books, and on balance it was rather unimpressive. We had some big market swings both up and down and some pretty good earnings reports but at the end of the day the S&P/TSX Composite Index was able to produce only a 2.5% gain for the three months to March 31st.

For the first time in several years, we're trailing the major US indexes by a considerable margin. Had it not been for the continued rise in the value of the loonie, which is up 3.9% since January 1st, New York would have been the better place for Canadian investors to put money.

The TSX was actually one of the worst performers in the world in the first quarter. Despite worries about the financial condition of Greece, Spain, Portugal, and other euro zone countries, several major European markets outperformed us.

If you want to know what's been holding back the TSX, take a look at the sub-indexes. One of the index's two major pillars, financial stocks, is still holding up with a first-quarter gain of 7.1%. But the other pillar, natural resources, is cracking. The S&P/TSX Capped Energy Index was off 2.8% in the quarter, while the Materials Index gained a meager 0.2%. Among resource stocks, only mining companies are pulling their weight, with a first quarter gain of 10.5%.

I've been saying for a long time that Yellow Pages (Toronto: YLO.UN, OTC: YLWPF) shares were oversold. Finally, the market is catching on to the fact. The units are up almost 30% from their low of last September and ahead by 9.5% since I advised buying them in February.

The big news was [the recent] announcement that Yellow Pages is acquiring rival Canpages for $225 million in cash and equity. Canpages, based in Vancouver, was never considered a major competitor, but its purchase further consolidates the stranglehold Yellow Pages has on the Canadian directory market.

In analyzing the deal, RBC Capital Markets said it is not expected to add to the net asset value of Yellow Pages but reduces the company's risk profile and strengthens the basic value of the shares. RBC maintained its $7 price target.

Yellow Pages has announced plans to convert to a corporation by year-end and will pay an on-going annualized dividend of 65 Canadian cents a share after that.

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