Time to Sell Enercare?

EnercareRecently a reader asked me to take a look at Enercare (ECI), formerly the Consumer Water Heaters Income Fund (CWI.UN ).  As I mentioned in a previous article – The Income Trust Countdown – many income trusts were purchased by investors only for the dividend yield, and in some cases that yield exceeded 10%. Of course with high yield comes high risk – but many investors seem to be indifferent to that fact. Now that most of these trusts have converted to corporations (other than REITs), they are under different tax rules and dividend obligations. Some Income Trusts have had exceptional balance sheets under their previous trust structure, and of course some never came close, other than high dividend yield and an increasing share price.

Take Enercare as an example. In a recent news release on January 20th, Enercare indicated that they will be keeping the same yield on their monthly dividends as when they were an income trust.  On December 31st the Consumer Water Heaters Income Fund (now Enercare) paid a monthly distribution of $0.054 (share price of $6.82) or an annual dividend yield of 9.5%.  The dividend remains the same at $0.054 as per the news release on January 20th – for a slightly lower yield of 8.51%, due to an increasing share price ($7.61 per share). The current dividend yield is at 8.70%.

However, one has to question the sustainability of this monthly dividend under the new corporate tax structure, as compared to the previous income trust structure. By keeping such a high dividend yield, Enercare is essentially leaving no capital or operating income for future growth, or managing its debt. And that debt is quite excessive at 778 Million with a liabilities-to-equity ratio of 4.59.  Combine that with a P/E ratio of 18.90 and a price to book of 2.35 and the stock price is simply overvalued.

In Summary, the balance sheet of Enercare is troubling, and the stock has had a very good run up until now. Based on the fundamentals of this company, I would be selling and taking profits. Enercare has rewarded its shareholders, but there is no guarantee they can continue to do so. A stop loss around $6.70 to $7.00 per share (and I would strongly suggest that) is also an option if you want to stay in for more potential growth. However, if Enercare lowers its dividend yield – since the yield is probably unsustainable with the debt load – you can be certain the share price will drop. If bad news hits sooner than later, you may not have time to run for the door!

Subscribe

If you enjoy receiving the Dividend Ninja in your mailbox, don’t forget to also subscribe to the Dividend Ninja Newsletter (and if you don’t like it – subscribe anyway). Thank you to all my readers!

18 Responses to “Time to Sell Enercare?”

  1. Financial Uproar

    Feb 09. 2011

    It’s refreshing to see a dividend investor talk about selling something. I think too many of them are content to buy and hold forever. Selling an investment is just as important as buying it.

    Reply to this comment
  2. The Dividend Ninja

    Feb 09. 2011

    @Financial Uproar
    Thanx for posting. I never bought CWI.UN or similar trusts becuase I felt they were overvalued and the days of high yield were over. But I did sell PGF.UN last year for a nice 30% profit, why not? However something like the Royal Bank I would never sell – its just too blue chip :) Thanks again for your comment.

    Reply to this comment
  3. Sunny

    Feb 09. 2011

    Selling Enercare? I am not for it. True its a good thing to sell, but selling Enercare is not a good option at this time, as I strongly believe it could reach the 10$ per unit. Remember that back in time, Enercare, than CWI.UN, has promoted (purchase recommendation) by Jean-François Tardif, top hedge fund manager. That was back in the days. At that time, CWI.UN was trading under 6$ per unit. It’s now exceeding 6$. Don’t forget that Enercare has an extremely solid foundation.

    Also, Enercare has extend its business – that’s why they can pay a generous yield. They are now involve in the electricity sector. Energy sector is in high demand. Rebecca MacDonald knew that when she started Just Energy. Enercare didn’t invest in electricity for nothing. Energy sector is huge.

    Selling Enercare at this time would be a mistake, from my opinion.

    Reply to this comment
  4. The Dividend Ninja

    Feb 09. 2011

    Hi Sunny, it’s nice to hear from you :) And I appreciate hearing a differing opinion.

    I’m not sure the foundation is so solid with a liabilities to equity ratio of 4.59 and 778 million debt. How will Enercare pay down that kind of debt while still maintaining profibilty and making monthly dividend payments? Don’t forget Income Trust days are gone – the playing field is like any other corporation now (they cannot just distribute their taxes to unit holders).

    While you may not want to sell Enercare, I would still suggest you put a stop-loss in place. That way if your right, no harm done you make money, and if I’m right you haven’t lost your shirt. Only time will tell.

    Take care, and thanx for dropping by ;)

    Reply to this comment
  5. Sunny

    Feb 09. 2011

    Thank you, love your blog. I will take time to visit more often.

    I see your point, too much debt, better sell now… Selling would be difficult for me. Sometime, I take some debt to create grow. I am pretty sure they hold those debt because of their recent activities in electricity.. which could pay off later… but that’s only me.

    I guess I will stay where I am but keep an eye on the stock and keep in mind your recommendation.

    Reply to this comment
  6. The Dividend Ninja

    Feb 09. 2011

    Sunny, thanx. I’m pleased to have you dropping by more often and saying hello :)

    Reply to this comment
  7. My Own Advisor

    Feb 10. 2011

    Agreed, Enercare as an investment is troubling. Since I don’t own it, I wouldn’t buy it. Enercare yield cannot be sustained long-term.

    On the other side of the coin, from Sunny’s point of view, if I owned it, I wouldn’t get out until they stopped their high payments. Once I own a stock, unless the business is fundamentally flawed and/or taking a long maybe permanent bath, then you might as well hold on and get paid.

    Is that bi-polar or does that make sense?

    I think there are better, small-cap businesses to own.

    Reply to this comment
  8. The Dividend Ninja

    Feb 10. 2011

    @My Own Advisor
    Thanx for posting. Yes your approach for Sunny is both wise and prudent. A stop loss however would allow her to reap the gains but protect her on the downside. Some of us are born to buy-and-hold and some of us are born to trade :)

    Reply to this comment
  9. The Dividend Ninja

    Feb 12. 2011

    @Potato
    Thanx for posting, and the additional information. I was thinking of a stop around $6.70 which gives lots of breathing room.

    Reply to this comment
  10. MA

    Feb 17. 2011

    Thanks for checking ECI out. I totally understand why it’s not in the Ninja’s portfolio, but I agree it should be ridden out.

    I am interested in what the revenue will be now that they have moved into the smart metering business. I wonder if they have been picked up by some mutual funds now that they are a corp.

    Where did you get the 778 mill debt? When reading the Sept 3rd qtr it states 599 mill. Am I missing something?

    Thanks,

    Reply to this comment
  11. The Dividend Ninja

    Feb 17. 2011

    Hi MA,

    UR welcome, and thanx for posting. For the information on the debt situation, I obtained that from the Globe and Mail:

    http://www.theglobeandmail.com/globe-investor/markets/stocks/summary/?q=ECI-T

    Reply to this comment
  12. ian mcleod

    Mar 02. 2011

    what is your current take on enercare after they reported

    Reply to this comment
  13. The Dividend Ninja

    Mar 02. 2011

    Hello Ian. I don’t see a significant change on the fundamentals: high debt, high dividend yield which may be unsustainable, and a sell-off from 52 week highs. I would wait patiently and see what happens in both share price and the balance sheet. I Would like to see the updated numbers, ratios etc.

    Reply to this comment
  14. MA

    Mar 02. 2011

    Although I was enjoying the divies, My stop loss came in at the 50 dma and sold. Will look to buy at lower values. Stocked up on some more Weston in the mean time.

    Reply to this comment
  15. The Dividend Ninja

    Mar 02. 2011

    @MA
    Think of it this way. The amount of money you saved from the loss on a falling stock, far outweighs any dividends ;)

    Reply to this comment

Trackbacks/Pingbacks

  1. Weekly Dividend Roundup - February 11th, 2011

    [...] Time to Sell Enercare? @ Dividend [...]

  2. Financial Uproar » Saturday Morning Dump- Links o’ Flannigan - February 11th, 2011

    [...] Ninja wonders if it’s time to sell Enercare (the former Consumer Water Heaters trust). What I like about the post is that he’s a dividend [...]

  3. The Dividend Ninja » What Happened to the Income Trusts? Part -2 - November 29th, 2011

    [...] first debt maturity (if required). I wrote about Enercare’s debt load back in February, in Time to Sell EnerCare? While the fundamentals haven’t changed, the stock price continues to rise. Coincidently, Benj [...]

Leave a Reply

*