The Facts (as of Aug 24, 2010)

Unit price: $28.74. Book value per unit: $12.50. Market cap: $477 million (medium). Distribution: $0.15 per month or $1.80 per year. Yield: 6.3%. P/E: 13.6x. Debt/equity ratio: 0.38. Payout ratio: 87%.

The Story

Wajax, established in 1858, is engaged in the distribution, sale and service of mobile equipment, industrial components and power systems including after-sales parts. Their customer base spans natural resources, construction, manufacturing, industrial processing and utilities.

The company has announced their plans to convert to a corporation by January 2011. As part of the conversion process, they have announced that they will maintain their distributions at $0.15 per unit for the remainder of 2010 and into 2011. In prior years, the company has paid a special distribution at year end equivalent to excess taxable income. This year, they will pay it monthly in the amount of $0.20 per unit for August, September and October.

The unit price spent quite a bit of time around $35.00 in 2007 and 2008, before crashing (along with the market) to $11.00 and quickly climbing back up to $23.00. Since then, the unit price climbed to $29, fell back around $23 and is currently around $29. It is hard to see much upside potential until the economy recovers.

Pros

Including the special dividend, a yield of over 14% for the next three months. (Aug 27, 10 is the ex-dividend date.) Should they be able to pay their taxes from operational earnings, the income stream will remain consistent, but improve in tax efficiency. The company is not widely followed, but the Sobey family has a large holding.

Cons

The business of Wajax is sensitive to the general economic health. The heavy equipment and power generators that they sell, rent and service will be most in demand when economic activity is strong. A mitigating factor is that when the economy is weak, more companies will rent or have their existing equipment maintained and serviced, to avoid buying new. The company experienced reduced earnings during the worst of the recession, and cut distributions accordingly.

Impression

There may not be a lot of growth potential in the unit price, but it makes sense to buy for the special distribution for the next three months. The unit price could also experience some upward movement as the fund converts to a corporation, making the income stream more tax efficient. We will have to wait and see what happens at that point.

Wajax WJX.UN

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