Marc Tellier, the head of Canada's largest business income trust, has two words for investors upset about not getting a raise in distributions: Blame Ottawa.
Yellow Pages Income Fund pays out 24 cents a unit to investors each month. The company reported a huge third-quarter profit increase yesterday and said it had enough cash to pay out up to 28 cents a unit. However, it decided to leave the amount unchanged, blaming, in part, the government's review of income trusts.
In an interview, Mr. Tellier said the company is unlikely to raise payouts for several quarters or until the government resolves the uncertainty its review of the income trust sector has caused.
"If you look at the market today, income trusts and YPG [Yellow Pages] are not trading on fundamentals," said the president and chief executive officer of Montreal's Yellow Pages Group Co.
"If we're not trading on fundamentals, our board and management feels it's more prudent to gain some clarity in the marketplace before going on to the next step of increasing distributions."
Yellow Pages was among those hit hardest when the income trust sector lost $23-billion in market value last month after Ottawa said it would cease accepting advance tax rulings for income trust hopefuls, and disclosed it was losing $300-million in taxes each year from the popular investment vehicles. In September, the government also launched a process to gather public comments on what changes, if any, it should make to the sector.
"I say this out of sorrow and not out of spite," Mr. Tellier said.
"The retail investor unfortunately -- and in the case of YPG we've got over 100,000 unitholders -- they're really the ones that have been penalized with the evaporation of equity that we've seen in the trust sector," Mr. Tellier said.
For each penny increase in monthly distributions, Yellow Pages investors would pocket an additional $4.7-million or $14.1-million more per quarter. In August, Yellow Pages said it expected to boost distributions by 6 per cent a year for 2005 and 2006, up from its previous guidance of 4 per cent.
Andrea Horan, an analyst at Genuity Capital Markets, said an increase in distributions by Yellow Pages would have been "foolhardy," considering it might have to cut them soon after if Ottawa imposes a less favourable tax treatment on income trusts.
"Once there's some clarity as to the tax situation in the market, there will be a greater tolerance for trusts who have to cut distributions who didn't raise them, than ones that raised them and then cut them," she said.
Ottawa is not only concerned about lost tax revenue, it has also raised suggestions income trusts may be a drain on productivity and economic growth.
Mr. Tellier dismissed those claims, pointing to the Yellow Pages' 67-per-cent growth in revenue during the quarter, resulting in part from the $2.55-billion acquisition of Advertising Directory Solutions Inc. (ADS) in May.
Yellow Pages said the integration of ADS, the former publisher of the SuperPages telephone directories in Alberta and British Columbia, is "now essentially completed."
The company expects to take a $15-million charge in the fourth quarter for restructuring and other costs associated with the deal.
Yellow Pages said third-quarter profit rose to $72.7-million from $41.4-million last year. Revenue from on-line operations increased 76 per cent to $9.8-million.
Profit for the first nine months of the year more than doubled to $200.6-million from $68.6-million in the same period in 2004. Revenue climbed to $646.7-million from $470.9-million.
Units in Yellow Pages Income Fund rose 33 cents to $14.38 on the Toronto Stock Exchange yesterday.
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
