My May High Yield of the Month picks AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) and Colabor Group (TSX: GCL, OTC: COLFF) have a lot in common. Both are Conservative Holdings, safe enough for even the most risk-averse, and are prime examples of the emerging new breed of post-trust Canadian high-yield stocks.

Both are growing rapidly in industries–energy infrastructure and food distribution, respectively–that have proven their ability to resist recessions amid the worst possible economic, market and credit conditions. Each has seasoned management and a well-capitalized balance sheet with little refinancing risk and a lot of cash to back up debt. AltaGas and Colabor have now posted robust first-quarter earnings that point the way to solid performances for the rest of 2010.

Finally, 2011 risk is behind them. Colabor has already converted to a corporation, and AltaGas will do so in July. As a result, both offer investors a clear path to wealth-building via generous and rising income streams and solid, growing businesses.

Now yielding well over 9 percent, Colabor posted first-quarter earnings that basically picked up where previous quarters’ strong results left off.

Cash flow margins, however, were increased to 3.05 percent of sales from 3.01 percent, thanks to rigorous cost controls.

That was a key to success because dividends are paid from cash flow rather than earnings per share. As a result the payout ratio came in at a steady 94 percent, and cash flow covered debt interest by nearly a 7-to1 margin, twice the required minimum of 3.5-to-1. Total debt was just 1.64 times annual cash flow versus a maximum allowed under the credit agreement of 3-to-1.

Colabor currently distributes about 35,000 products from over 550 vendors and manufacturers to over 25,000 outlets via distributors in Eastern Canada. Sales are broken down into Wholesale and Distribution. The wholesale side of the business buys primary products and sells them to major retailers, who then sell them to businesses. The distribution side sells directly to businesses, such as the restaurant industry.

Both sides of the business continued to operate in difficult conditions in the first quarter, and management states that “restrictive market conditions in the food service industry will also affect the second quarter of this year.” The positive side of that, however, is there are solid opportunities for the company to expand through acquisitions in what is still a diffuse industry across Canada.

Plans to build dominance in Ontario as it has in Quebec and Atlantic Canada are high on the agenda. And a successfully floated CAD50 million convertible bond issue paying just 5.7 percent–with a conversion price CAD16.85 per common share–has enhanced the company’s financial flexibility.

Valuations are low. Shares trade at just 1.38 times book value and 17 percent of sales as well as only a little over 6 times projected 2011 cash flow.

On track to grow profits as expansion continues–moreso if the Canadian economy picks up steam–Colabor Group is a buy up to USD12 for all those who haven’t already bought it.

AltaGas has announced three major developments in the past two weeks. The company’s first -quarter earnings were right in line with guidance, as its electric and gas infrastructure portfolio continues to run well. The company reached a deal to acquire a sour gas plant in the Montney Shale region that will begin boosting cash flow in late 2010. And it released details for its planned conversion to a corporation on or around July 1.

The conversion was the eye-grabber, particularly the announcement of the new dividend rate. Management stated it would continue to pay a monthly dividend, but at the reduced rate of CAD1.32 per share. That was 38.9 percent below what AltaGas has been paying as a trust since September 2008. However, it was also on the high side of the CAD1.10 to CAD1.40 per share range previously announced by management, and it still leaves a current yield approaching 8 percent.

The reduction has taken AltaGas units down a little over 5 percent since the announcement. It shouldn’t be long, however, until they enter a powerful uptrend that will take them back to the upper 20s range they held prior to the late 2008 market crash–and well beyond.

The key is the company’s growing portfolio of natural gas and green power assets, which management continues to expand with a combination of building and buying.

In the former category, AltaGas has targeted CAD2 billion of “organic” projects over the next five years, basically expansion of existing assets that’s almost always fully contracted before construction begins.

Much of these are midstream oil and gas projects that cash in on strong producer demand in newer areas of the energy patch, such as British Columbia and northwest Alberta.

But the company has also become a major player in renewable energy, with 277 megawatts projected to begin operating in BC between 2014 and 2016. The company also plans to develop underground natural gas storage facilities in Atlantic Canada after the acquisition of Landis Energy.

Having such a wide range of high potential projects gives management a great deal of visibility about future earnings. Near-term earnings have been crimped by low power prices in Alberta and reduced energy patch activity. Nonetheless, the company still managed positive revenue growth in the first quarter of 1.7 percent and a 13.4 percent jump in sales factoring out energy costs.

Operating income was lower by 14.8 percent, not including a one-time gain on risk management measures. But cash flow from operations was up more than 20 percent and the dividend was well covered again by funds from operations. The company expects natural gas liquids, gas gathering and power operations to continue to shine the rest of the year, pushing cash flow higher the rest of the year.

With cash flow on an upward course and the company paying out what it did in 2004, there’s plenty of room to see dividend increases, once it’s able to operate as a corporation for a period of time and as new projects come on stream. AltaGas’ policy of hedging out as much commodity price exposure as possible–for power as well as natural gas liquids spreads–is also conducive to keeping the balance sheet healthy and the distribution well covered.

During the company’s first quarter conference call, Chairman and CEO David Cornhill stated they would likely continue the “tradition” of reviewing the dividend level in July or August, once management had completed the long-term planning process. That means the next opportunity for a higher dividend would be in summer 2011.

The new policy will be based on net income and the company expects a payout ratio in the near term of around 100 percent. Cornhill forecasts that will decline in short order to a target range of 60 to 70 percent as new projects start producing cash flow.

We’ll have our next opportunity to gauge AltaGas’ progress on July 29, when it will announce second-quarter results. In the meantime, with 2011 risk behind it and a bright future ahead building out cash generating assets, AltaGas Income Trust is a superb low-risk buy up to USD20.

What can go wrong at AltaGas and Colabor? Let’s take each of the “Four Horsemen” I highlighted in In Brief. The hallmark of my Conservative Holdings is little or no direct exposure to commodity price swings. What little AltaGas has is all biased on the upside. It wins when the prices of oil, power and natural gas liquids rise, and management hedges away the risk of falling prices. Colabor’s business, meanwhile, could take a hit if soaring transportation costs curtailed orders, but that didn’t even happen in mid-2008 when energy prices spiked.

With conservative financial policies, neither is exposed on the credit side in the unlikely event the sovereign debt crisis reaches these shores. In fact, both proved their resiliency by continuing to expand when credit markets froze up in late 2008.

US investors who hold these trusts outside an IRA will probably see their tax rates rise next year. Those who hold them inside an IRA, however, will no longer be assessed the 15 percent withholding tax. And because both are heavily owned by Canadians, there’s unlikely to be much selling if US tax rates do go up.

That basically leaves the risk of a double-dip recession, which would hit sales even in these businesses. Here again, however, conservative financial policies provide a great deal of comfort. Even in the first quarter of 2009–when the recession in Canada hit the most–AltaGas’ payout ratio was just 74 percent, while Colabor’s was 88 percent.

Past performance doesn’t assure future results. But again, as long as these companies are putting up solid numbers, there’s no reason to expect they won’t face down whatever risks lie ahead.

For more information on AltaGas and Colabor visit How They Rate. Click on the TSX symbol to go to the website of our Canadian partner MPL Communications for press releases, charts and other data. These are substantial companies, so any broker should be able to buy them. AltaGas has a market cap of CAD1.4 billion, and Colabor’s is nearly CAD250 million.

Note that like most foreign companies, these securities are not “blue skied” in some states, meaning that brokers can’t technically suggest them to you. Also, US investors are generally not permitted to take part in secondary offerings. Neither point, however, prohibits any American from purchasing these securities on the open market, either on the Toronto Exchange or over the counter (OTC) in the US. If your broker won’t make the trade, make it somewhere else.

Click on the trusts’ names to go directly to their websites. AltaGas is listed under Energy Infrastructure, while Colabor is tracked under Food and Hospitality. Click on their US symbols to see all previous writeups in Canadian Edge and its weekly companion Maple Leaf Memo.

Distributions paid by both companies are considered 100 percent qualified for US tax purposes. Both provide tax information to use as backup for US filing–whether or not there are errors on your 1099–on their websites. Tax information to use as backup for US filing–whether or not there are errors on your 1099–is available in the Income Trust Tax Guide.

As is customary for virtually all foreign-based companies, the host government–in this case Canada–withholds 15 percent of distributions paid to US investors at the border. If you hold these trusts outside an IRA, the tax can be recovered by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation, though unrecovered amounts can be carried forward to future years. Form 1116 recovery will also be possible after these trusts convert to corporations.

Distributions from both Bird and Paramount should be exempt from 15 percent withholding once they convert to corporations, if they’re held in an IRA or other tax-deferred retirement account. For more information on IRAs and withholding, see recent Canadian Currents articles on the CE website.