The Facts (as of July 6, 2011)

Share price: $8.04. Book value per share: $2.28. Market cap: $397.8 million (medium). Distribution: $0.0975 per month or $1.17 per year; expected to be reduced to $0.59 per year as of July 2011. Current yield: 14.6%; expected yield: 7.3%. P/E: 29.8. Debt/equity ratio: 3.61. Payout ratio 433%.

The Story

New Flyer is North America’s leading manufacturer of heavy-duty buses. Offering the broadest line of transit vehicles in Canada and the U.S., we produced the first low-floor bus, the first diesel-electric bus and most recently, the world’s first zero-emission hydrogen fuel cell fleet. We remain dedicated to innovation and excellence as we provide a range of products such as clean-running, fuel-efficient hybrid buses; zero-emission electric trolleys; buses with alternative fuels, like hydrogen, CNG, and LNG; and clean diesel buses. Our products put us on the map. Quality and innovation keep us ahead.

In the last few weeks, New Flyer has announced that they will convert from an IDS to a corporation. This will be done via a cashless rights offering, allowing current investors to swap an IDS (“stapled unit”) for common shares. At the same time, the distribution will be changed to a dividend, paid at around 50% of the current rate. A special dividend is expected to be paid over the next 12 months, assuming the plan is accepted by shareholders.

Pros

The payout is being reduced, which will provide more flexibility to the company. The new dividend will also be taxed more favourably, for investors holding the shares outside of a registered plan. The company remains profitable and has an improving outlook. Management is said to have done a good job navigating difficult economic circumstances, so they should do even better as the economy recovers.

Cons

Personally, I’ve taken a double hit: the share price has fallen and the income it produces has been cut. There is some real uncertainty around how the conversion will play out, although it’s not without precedence. The last two years have been very difficult, but orders are still coming in and the last couple quarters have shown improvement.

Impression

I own these units, and I have decided to continue to hold them. I will just wait and see, since it’s so difficult to say what the outcome will be. I wouldn’t buy more, at this point.

New Flyer Industries NFI.UN

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