July 27, 2012 Comments

I am just taking a look at RioCan‘s annual report. I am looking at this company with some suspicion. It seems to me it is to some extent a work of financial engineering. It has a high yield. But the dividend appears to be higher than its earnings (setting aside market gains on the buildings). Some 22% of the distributions flow right back to the company under the dividend reinvestment plan. On top of that the company tends to issue a significant amount of new units each year. So how real and sustainable are the distributions when in the net the company is not really sending out much money?

But the company is growing its assets as well, so that is good.

I am not saying that the new units sold are used to pay distributions, in fact most of the new money is certainly used for new buildings. But does some of the new money go to pay distributions? I don’t know.

Companies that grow by issuing new shares are harder to analyze. The Book value per unit grows not only because of retained earnings but because of issuing new units at higher prices than book value. And RioCan is allowed to mark its building up for gains in market value, so that is vastly different than traditional accounting where buildings were kept on the books at cost.

RioCan tends to rely on the idea that its buildings only increase in value. But at some point don’t buildings basically wear out?

It may be easy to send out distributions as long as money is flowing back in from sales of new units/shares. But what would things look like if they stood still and did not sell new units and did not add new buildings for a while. Would the existing properties be able to support the distributions (after paying building capital maintenance costs)? That is part of what I struggle to understand.

Maybe RioCan is just fine, but I do look at it with some suspicion.

They report Q2 earnings on August 10 and I hope to update the report shortly after that.

Friday was a strong day in the markets. Stantec was one of the bigger gainers up 4.6% at $27.85. This is a stock that I would definitely consider buying. In fact I am wondering why I did not add to my position at recent prices. In recent weeks I was more in the mode of selling stocks to raise some cash…

Canadian National Railway is updated and rated Buy at $88.40 on Toronto or U.S. 87.98 in New York. It is a very strong company with an excellent history. It does not look that cheap but it will likely continue to be a good investment over time.