3 Canadian Names Yielding on All Fronts

03/29/2012 9:30 am EST

Focus: GLOBAL

This trio are performing on all cylinders now, and are great choices for income investors looking for exposure outside the US, writes Dave West of Money Reporter.

When things are already going very well for a company, it’s difficult to do them any better. That would describe the pleasant problem faced by Canadian Apartment Properties REIT (Toronto:CAR.UN).

CAP REIT made its investors 36.63% in total return in calendar 2009, versus our REIT category average of 31.8% and the TSX’s REIT Index rise of 12.9%.

In 2010 the company generated a total return of 32.13% versus our category average of 24.6% and the REIT Index gaining 15.1%.

That’s because it’s a well-run company, and dominant in its niche of owning and managing rental apartment buildings. But if it’s already doing so well, the opportunities to do even better become limited.

We want to be clear on this: CAP REIT is a great investment—has been and should continue to be—and we’ll certainly accept the continuation of the returns this company has produced in the recent past.

So we’re not saying it has topped out and it’s time to get rid of it. Not at all. We’re simply saying that we may have to temper expectations that future earnings increases may not be as great as they have been in the past. We’ll likely be looking for fine-tuning improvements of already-good results.

Take the most recent quarter; the fourth of 2011. In that quarter alone, revenues rose to $94.6 million from $85.6 million in the same period a year ago, and net operating income rose to $52.6 million from $46.6 million, meaning that the operating margin also increased to 55.6% from 54.4%.

However, because the number of units outstanding also increased, net funds from operations per unit rose only slightly, to 31.2 cents, from 30.9 cents. That’s what we mean by more modest earnings increases.

And earnings for the full year of 2011 actually declined on a per-unit basis. Revenues rose to $362 million in 2011 from $339 million in 2010. Net operating income rose to $206.2 million from $190.3 million, and the operating margin rose to 57% from 56.2%.

But net funds from operations per unit declined slightly to $1.357 from $1.371, again due to more units outstanding.

Now, you might ask, why so many more units outstanding? And in a nutshell, the answer would be acquisitions. In October CAP REIT completed an offering of 7,475,000 units at $20.30 per unit, for aggregate gross proceeds of $151.7 million, to repay borrowings for acquisitions. Acquisitions that brought an additional 2,660 suites into their portfolio in 2011, versus 691 in 2010.

That’s good news. CAP REIT appears to have squeezed about as much efficiency as it can over the suites it already controlled. New suites means more efficiencies down the road, and more money for its investors. CAR.UN is a buy.

Davis & Henderson (Toronto: DH)
Also a Best Buy last month. This company, which has been around for over a century (since 1875), is most recognized by the general public as the entity that supplies replacement checks through their bank.

Most of this public don't recognize, therefore, how deftly DH has worked its way into banking's essential processes, providing them with technology services for checking, credit card, lending, and leasing products. The current yield is 6.99%.

Pembina Pipeline (Toronto: PPL)
Also a Best Buy last month, and now a few cents cheaper. You can't argue with success: Pembina was one of our best-performing selections last year.

Also, being in the pipeline business, it's also in the sweet spot, as the US recognizes its need for our liquid resources all while TransCanada's (TRP) US pipeline project is on hold and the oil sands continue to ramp up production through 2015. Current yield is 5.63%.

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