Can cutting distributions be a good thing for an income trust?

Merrill Lynch analyst Sumit Malhotra sees Thursday's bad news from GMP Capital Trust as reason to revisit the holding.

Following the decision to cut monthly cash distributions to 10.42 cents a unit from 14 cents, Mr. Malhotra says the worst may be over for the investment dealer, which is seeing results suffer in the face of an industry-wide downturn.

"Having watched GMP shares plunge 19 per cent since the end of June, we were of the view that the market was gradually pricing in the cut in the distribution," said Mr. Malhorta in a report. "As perverse as it sounds, the decrease today does remove the uncertainty that had plagued the shares."

He concluded that "a yield in the 11 per cent range on the new $1.25 [annual]distribution suggests to us a reasonable bottom on the stock."

It's worth noting that the Merrill Lynch analysts still has an "underperform" rating on this trust, a view that's unlikely to change until the investment banking sector returns to life.

After hitting a 52-week high of $25.43 last November, GMP units touched a 52-week low of $11.75 early Thursday, and are now changing hands at $12.15, which values the dealer at $808-million.