Recently 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!
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