Chemtrade Logistics Income Fund (CHE.UN) has been outperforming since our August 22nd INK Morning report. Here is the video summary of that report where we look at what might explain the high yield at the income trust.
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Script (check against delivery):
Chemtrade Logistics Income Fund currently pays 10 cents per Unit on a monthly basis giving it an 11.9% distribution yield, more than twice the market average of 4.7%.
Such a high yield often signals a distribution at risk However, Chemtrade has paid its 10-cent monthly distribution since January 2007.
In Q2, Chemtrade distributable cash after maintenance capital expenditures was 44 cents per unit versus 36 cents in Q2 2018, a 22% improvement.Moreover, insiders have been buying.
With history, cash flow, and insider buying on the side of maintaining the distribution, what could help explain the high yield?
Two types of risks come to mind. The first is economic. Chemtrade is in the industrial chemical business focused on sulphur, water treatment and electrochemicals. All are vulnerable to an economic downturn, which is a scenario that currently worries many investors.
Chemtrade structural risk is the other factor. It is an Income Trust which oversees subsidiaries that operate 60 different facilities. In addition, Unit holders outside of Ontario, Quebec and Alberta could face the risk of potential personal liability for unmet fund obligations.
Given the structural risks, we expect Chemtrade to trade with an above average market yield. However, investor, pessimism on the economy might be overdone suggesting that there is a chance the yield will eventually move lower via price appreciation.
Our report which is not a recommendation to buy or sell securities is available through INKResearch.com or the Canadian Insider Club. Good luck friends and thanks for listening
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