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Invest Style

One good idea: Buy health care income trusts

High yields, steady income provide some stability

By Dianne Maley
Globe Investor Magazine Online, March 6, 2009


The Source: Trevor Johnson, analyst at National Bank Financial

The Idea: Buy health care income trusts.

High yields and a stable, reliable income stream characterize the investments on Mr. Johnson's list, led by CML HealthCare Income Fund. It's a compelling story - walk out of your doctor's office with a requisition for routine blood tests or X-rays, and chances are you'll be taking it to a CML lab.

CML dominates the laboratory testing business in Ontario, with a full third of the non-hospital testing market. Its main customer is the Ontario government through OHIP, making its earnings "highly visible."

CML is also the biggest medical imaging outfit in Canada. In January, 2008, it expanded into the United States, opening 17 labs there.

"Since then, the unit price has not performed well at all," Mr. Johnson says.

Investors are nervous about the move because profits in the U.S. are not as predictable given the differences in the medical system, Mr. Johnson says.

But the potential rewards are noteworthy. At yesterday's close of $13.40, CML is yielding about 7.8 per cent. Mr. Johnson's one-year target price is $15.

Also on Mr. Johnson's list are Futuremed Healthcare Income Fund, K-Bro Linen Income Fund (supplier of linens to hospitals) and Medical Facilities Corp. All four are likely to move with ease from trust to corporation ahead of the looming 2011 deadline because of their strong earnings, he says. As well, the health care industry as such is seen as defensive relative to the rest of the stock market.

Health care companies will benefit from the aging of the baby boomers over the next 20 years, Mr. Johnson says.

And earnings momentum is strong.

"Year over year, 2008 distributable cash per unit growth, a measure of value creation, is expected to be 6 per cent for CML, 2 per cent for Futuremed, 12 per cent for K-Bro and 8 per cent for Medical Facilities," Mr. Johnson says.

"[That's] solid considering that each redistributes 70 to 90 per cent of all free cash flow generated to unitholders," he says.

The Payoff: Total potential returns - distributions and capital gains - that far exceed what is generally available in the stock market.

At $8.70, Futuremed is yielding 11.4 per cent, K-Bro at $10.22 is yielding 10.7 per cent and Medical Facilities at $7 is yielding 14.8 per cent.

The Big Risk: For CML: "The U.S. fails to deliver and the [skeptical] market view becomes permanent" so the unit price languishes, he says. As with any marketable investment, unit prices of the four trusts could fall. In the worst case, distributions could be cut, something Mr. Johnson deems unlikely.

Why listen to Mr. Johnson?

He has been covering income trusts for about five years and was the top earnings estimator for business trusts in StarMine's 2007 ranking.

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