I own shares of Enercare Inc. (ECI), which went up a lot this week after Brookfield Infrastructure Partners LP (BIP.UN) offered to buy the company. My commission-based investment adviser suggested that I sell the stock so I can “put the money back to work right away,” but the shares are held in a non-registered account and I would have to pay capital gains tax. What do you suggest I do?
First, kudos to you for questioning the “advice” you are being given. I can’t be certain of your adviser’s motivation, but let’s just say the benefits of following his or her suggestion would accrue largely to one party. And it isn’t you.
If you sell your Enercare shares, your adviser would presumably generate two commissions – one on the sale, and another when the cash is redeployed into another stock. Commissions for full-service brokers can easily run into the hundreds of dollars, so it’s not surprising the adviser is eager for you to sell.
Selling would have other negative consequences for you, over and above the commissions you will have to pay. I don’t know how long you have held Enercare, but the shares have more than doubled over the past three years and they jumped 50 per cent this week alone. So, if you sell, you’ll be facing a potentially significant hit from capital-gains tax.
Now, the good news: There is a way to avoid – or at least dramatically reduce – all of these unpleasant consequences.
Enercare shareholders are entitled to receive $29 a share in cash under the BIP transaction. If you accept cash, you will still have to pay capital-gains tax. However, Canadian resident shareholders can instead elect to receive units that are exchangeable into BIP shares.
Taking units instead of cash “will provide a capital gains tax-deferred roll-over option for taxable Canadian holders of shares who elect to receive exchangeable units,” the companies said. The number of exchangeable units is capped at 15 million and will be prorated if requests exceed that number, but it’s possible that you could receive units exclusively and avoid capital-gains taxes altogether. In the recent merger between Choice Properties REIT and Canadian REIT, for example, Canadian REIT unitholders who requested Choice units were not subject to proration. (Note: You’ll still have to pay capital gains tax when you eventually sell your BIP units; for tax purposes, the adjusted cost base of the units will equal the cost of your Enercare shares. For investors who hold Enercare in a registered account, there are no capital gains taxes to worry about.)
The fact that Enercare is trading very close to the $29 offer price indicates the market is assigning a high probability to the deal going through. BIP is a fine company – I own the units myself, both personally and in my model Yield Hog Dividend Growth Portfolio, which is another reason to consider accepting exchangeable units. Your adviser may not like it, but it’s your money.
What is your opinion of Just Energy Group Inc. (JE) as a dividend investment? The 10-per-cent yield looks very tempting.
When a stock has a double-digit yield, it’s imperative to dig deeper. In Just Energy’s case, the yield is high because the share price has plunged about 50 per cent since the end of 2015. Another concern is that the company – which sells electricity and natural gas contracts and energy efficiency products to homes and businesses – has a history of dividend cuts, having chopped its payout by 32 per cent in 2013 and 40 per cent in 2014.
Clearly, this is a company that has faced some challenges. In March, Just Energy named a new chief executive as part of a senior management shakeup and, in May, the company announced disappointing earnings for its fiscal fourth quarter as unfavourable weather, intense competition and other factors hit its results. Just Energy is aiming to transform itself from a retail energy provider to a more broadly diversified consumer company, but the languishing stock price suggests investors are skeptical.
When the latest results were released, the company said it is committed to its dividend. However, the dividend payout ratio is high: For the fiscal year ended March 31, the payout ratio soared to 95 per cent of “base funds from operations” (essentially operating cash flow minus certain capital expenditures). That’s up from 60 per cent in fiscal 2017. The company says its goal is to reduce the payout ratio to 75 per cent by the end of fiscal 2019.
Despite Just Energy’s challenges, analysts are generally positive on the shares, with five buy recommendations, two holds and no sells. The average one-year price target is $5.91. The shares closed Friday at $5.01 on the Toronto Stock Exchange.
Just Energy’s supersized yield is telling you that the market perceives some elevated risk with the stock, which is not surprising given the company’s history. Perhaps Just Energy will turn things around and this will prove to be a good entry point. But as a conservative investor, I look for companies that have a history of raising their dividends, not cutting them.