Mining for Dividends
07/24/2008 12:00 am EST
Bryan Perry, editor of The 25% Cash Machine, says a Canadian coal trust has strong growth prospects and pays a fat dividend.
Fording Canadian Coal Trust (NYSE: FDG) is an open-ended mutual fund trust and one of the largest royalty trusts in Canada. It [has a] 60% interest in the metallurgical coal operations of the Elk Valley Coal Partnership.
Elk Valley Coal is the world’s second-largest exporter of seaborne metallurgical coal, supplying high-quality coal products to the international steel industry. Coal prices spiked 20% during the end of June and beginning of July, and then corrected. The correction followed a massive run-up during June with prices at the beginning of July rising between 30% and 40% month over month.
[But] the underpinnings of the supply and demand equation for metallurgical coal are solidly bullish. Infrastructure growth in China and other emerging economies is driving demand for steel on a worldwide basis, and there are real shortages, as evidenced by current delays of a month or more in shipments from Australia bound for steel producers in China.
Fording declared a second-quarter cash distribution of $2.50 (Canadian) per unit to be paid on July 15th to unitholders of record on June 30th. The distribution, for the period April 1st to June 30th, represents an annualized dividend of $10 per unit. And that, my friends, translates into a current dividend yield of about 11% at a price of $77 per unit after applicable taxes.
FDG’s share of coal sales volume was 3.5 million tons, 22% higher than in the first quarter of 2007. Sales volumes in the first quarter of 2007 were unusually low (due to weather-related rail transportation problems), but based on the size of the second-quarter dividend payment, business has obviously turned around and is headed back up. I believe that we will see future dividend payments rivaling the recent quarter.
Fording Trust has elected to be taxed as a corporation for US tax purposes, so distributions are reportable on a Form 1099 and are considered foreign-source dividend income to the extent paid out of current or accumulated earnings and profits of the trust. [They] should be “qualified dividends,” eligible for taxation at reduced rates under US federal income tax legislation.
Distributions paid by the trust to US unitholders are generally subject to a Canadian withholding tax of 15%. This takes the effective dividend yield down from around 13% to about 11%, which is still an excellent payout. As a US unitholder, you should consult your tax adviser for the correct tax treatment of distributions.
Shares of FDG hit an all-time high of $96 on June 30th, then the stock fell to about $77 (where they traded Wednesday—Editor), making the shares very attractive based on forward numbers. Fording should see revenues rise more than 100% in 2008, and earnings are expected to grow better than 60% in 2009, approaching $14 per share. If those predictions hold, FDG is a good buy under $80.Subscribe to The 25% Cash Machine here…