Monday, August 6, 2007

Bought more AAV

On my lunch break I happened to see that AAV was down about 6%. There isn't any news that suggests a reason for this, but the Yahoo Finance message boards speculate that the sharp drop is due to two factors. First, they speculate that over the past few months, hedge funds have been spending a lot on Canadian energy stocks because of the possibility of quick gains from mergers and acquisitions within the industry due to the depressed share prices. There has been some activity on those fronts, but not as much as was expected. Now that prices have been recovering, they are not as attractive for takeovers, so people are losing faith in buyout rumors. The hedge funds need to sell their shares and take their money elsewhere. Some have suggested that they are facing credit pressures due to their use of margin and leverage. Whatever the reason, there's no doubt that there was a large amount of selling done today.

Anyway, the second factor (according to the boards) in the price drop was that Canada's markets are closed today. This took away a good portion of the support for AAV in terms of buyers. The high selling activity in combination with the low buying activity can only mean one thing -- sharp drops in price.

Who knows how accurate the part about hedge funds is, but on the face of it this looks like another good chance to buy some AAV while it's undervalued. I originally got in even lower than this point, and as it climbed I regretted not buying more shares. Now it seems that I have another chance. To get some fast cash, I sold my entire DUK position. I'm not disenchanted with DUK or anything, but it was either that or GE. I put the proceeds into AAV.

This is one of the two reasons I don't have AAV in my IRA. The first one is that I heard that the foreign taxes on AAV dividends can't be recovered in an IRA (which doesn't bother me right now, but could be important down the road). The second is that it's a pretty volatile stock and that's not the sort of thing you want in a small IRA. My IRA money is fully invested and I can't contribute anything more this year. If a stock drops significantly, I'm stuck just watching it or cutting my losses and selling. As my balance grows over the years (can someone tell me why contribution limits are so annoyingly low, when 401(k)'s and other retirement instruments have much higher limits??? It really stinks for those of us who don't have a retirement plans via their jobs) I will build up enough ballast in the form of bonds and cash that I can invest in riskier stocks. But until then, my IRA will have to be a bit more conservative.

Luckily, I got in just before AAV began a slight recovery. Even if it goes up quickly again, I don't think I'll sell these shares. Instead, I'll take my next few contributions and restore my position in DUK. I'm excited thinking about what my portfolio will look like by Christmas.

By the way, even though it's high summer, with temperatures reaching 100F, Christmas is only about 4.5 months away. Isn't that weird? I need to take a few more trips to the beach this year before the sun is gone. I should also start thinking about budgeting for presents in advance (something I've never, ever successfully done).


SavingDiva said...

I'm also trying to budget in advance for Christmas presents...we'll see how successful I am.

How do you choose individual stocks? Do you do a lot of research on them? I mostly invest in mutual funds and ETFs...diversified things that make it easy for me...

Zachary said...

I haven't bought any more AAV lately, since I've been trying to max out my IRA for the year. I do have an unhealthy love affair with AAV, though!

stealthy said...

Those dividends are getting bloated :D congrats!

Just one question. I saw that the payout ratio for AAV is 562%, which means they are paying out more than 5 times more than they are making right?

If I'm reading that right, does it not scare you a little bit? I got the info from Yahoo Finance(key statistics).

I noticed they issued new units a few months ago and was wondering if that's how they are able to continue to pay the high dividends without making the profit to back them up.

Jon said...

The payout ratio is a confusing issue for Canadian royalty trusts because I think they use different metrics than American companies. If you look at their quarterly report you see their payout ratio is 76%, which is actually rather low for them.

Canroys don't pay tax on income they pass on as distributions and so they deduct distributions from their income statements when calculating net income. But other companies don't deduct distributions because they get paid after taxes (they're double-taxed actually), so that money is counted in their net income.

For instance, say AAV has $100 million net income, then pays $76 million in distributions and reports their net income as only $24 million (that's what they pay taxes on). AAV would say their payout ratio is 76%. Yahoo Finance sees the report that their net income is $24 million, but doesn't realize dividends have been subtracted from that so it says their payout ratio is 76/24 = over 300%.

Another issue is that I think Yahoo and other places calculate the dividend payout by adding up the last year's worth of dividends. But since AAV had a huge dividend cut, that's misleading.

They issue new units every month I think because of their DRIP program, which creates new units and sells them for a 5% discount (to Canadians only unfortunately). You're right in that it is important to watch that, but hopefully they will use that money to expand. That is one of the differences between Canadian royalty trusts and American ones -- Canadian ones are free to use their money to expand operations, whereas American ones are created for a specific purpose, and when the resources are gone the trust dissolves.

stealthy said...

Thanks for the explanation! I've got a grasp of it more clearly now.