Businesses that proved their mettle during the worst possible conditions, while laying the groundwork for robust long-term growth: That’s the hallmark of both June High Yield of the Month picks, Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF) and Just Energy Income Fund (TSX: JE-U, OTC: JUSTF).

Both also offer high yields that they’ve increased generously in the past. Management has pledged to maintain their payouts at current levels when they convert to corporations in time for 2011 taxation. And despite some recovery from last month’s Flash Crash, both are back to share prices that ensure robust long-term returns.

A new addition to the Conservative Holdings this month, Cineplex Galaxy has been a buy recommendation in How They Rate for some time. But after reporting strong first-quarter earnings and announcing a no-cut conversion to a corporation but nonetheless sliding more than 8 percent in the stock market, it merits a higher profile.

First-quarter results again showcased the strengths of the company’s growing network of state-of-the-art theaters. Revenue surged 21.9 percent from year-ago levels, spurred by a 13 percent increase in attendance.

Impressively, gains were as robust at theaters the company had operated for more than a year, as well as at new facilities. “Other Revenue,” which includes ancillary services, rose 24.9 percent. Net income surged 157.7 percent, while cash flow and distributable cash flow per unit moved ahead 18.1 percent and 17.3 percent, respectively. All were records.

Behind those headline numbers were even more impressive statistics. Box office revenue, for example, was the highest in company history. The company’s loyalty program grew to some 2.3 million members, adding 170,000 new members in the quarter alone.

Media operations that target advertisers saw a 34 percent jump in revenue, in large part due to the return of automobile advertisers. It also installed 50 RealD 3D projection systems, bringing its totals to 199, or 15 percent of total screens across Canada. And the company continues to add IMAX capability as well to its screens.

The latter dramatically boosts Cineplex’ ability to capture the surging 3D film business in a way smaller, less-well funded rivals simply don’t have the wherewithal to match. And the company is building a similar technological advantage in Canada by developing a digital movie download service with Roxio CinemaNow.

As for acquisitions, the company made two during the first quarter, both in Quebec, which should begin adding to cash flows once renovations are made later this year. Plans to open two major facilities in Calgary are on track for later this month, with a new opening in British Columbia slated for completion in November.

The company anticipates a fourth quarter vote on it plan to convert to a corporation, with a conversion date of Jan. 1, 2011. The plan is a non-taxable event with no change to either the company’s growth strategy or its current distribution rate. Anticipated impact of taxation is a mid-teens rate, taking the payout ratio from its current level to the 65 to 80 percent range, which management states is “a nice range.”

In the end, making good on that promise depends on the movie industry continuing to crank out good product. That’s something the industry has been able to do consistently over time. And with other countries now offering product in addition to Hollywood, there are plenty of choices.

My expectation for Cineplex Galaxy’s total return is steady appreciation into the mid to high 20s in the next 12 to 18 months. That’s in addition to a resumption of growth in the 6.5 percent yield. Buy Cineplex Galaxy Income Fund up to USD20.

Just Energy also came in with strong quarterly numbers, which it accounts for as the fourth quarter of fiscal 2010. That’s owing to the traditional seasonal nature of its business, which has historically been due to Canada’s greater need for energy in the winter months. Seasonal factors aren’t likely to be as imposing in fiscal 2011, thanks to the acquisition of 680,000 customers in the US with the Hudson Energy buyout.

Highlights for fiscal 2010 included a 28 percent jump in customers, fueled by acquisitions as well as a 36 percent increase in clients attracted by the company’s marketing efforts. The most successful of these have been for Just Energy’s green energy offerings, with 39 percent of new customers taking an average 81 percent of green energy supply.

Customer additions actually accelerated during the three months ended March 31, up 54 percent from the fourth quarter of 2009. That was somewhat offset by relatively high attrition in the US customer base due to the challenged economy. The company has mitigated much of this exposure by hedging energy price exposure and by its ability to recover bad debt in the worst hit areas of its service territory.

Marketing costs cut into distributable cash flow during the quarter. So did the cost of running two start-up operations acquired with last year’s Universal acquisitions, which are expected to be cash flow generators in fiscal 2011. US taxes also rose as operations in this country expanded to 42 percent of overall margin.

Just Energy’s payout ratio, however, remained a manageable 82 percent. Moreover, the company affirmed expectations of 5 to 10 percent growth in margins for fiscal 2011, its primary measure of profitability, as it continues to absorb new purchases. A return of robust economic growth to the US would almost certainly make those numbers even better.

In the long run Just Energy’s prospects continue to track the expansion of deregulated utility services in North America. Opportunities continue to present themselves on both sides of the border, even in the US, where electricity deregulation has hit a brick wall in most states. Newly acquired Hudson, for example, grew its customer base by a compound rate of 47 percent per year from 2004 to 2009. Adding its expertise, particularly when it comes to attracting commercial clients, should help the company’s operations continent-wide.

Just Energy’s addition of 505,000 new customers in fiscal 2010 were its most ever and a clear sign it’s capable of growing in all environments. The challenges are well known–continuing to attract business and hedging out all risks possible. And there’s always the chance the company will run afoul of officials in some states and provinces where it operates.

So long as it succeeds in meeting these challenges, however, Just Energy looks headed for robust returns. Insider buying is a clear indication management believes. So are the repeated assertions of Chairman Rebecca MacDonald and CEO Ken Hartwick that the company will hold its distribution at its current level when the trust converts to a corporation later this year, its 10th as a public company.

The stock has nearly recovered from its Flash Crash spill. But unique as a high-yield company with growth, I expect to see Just Energy trading back at least where it did in late 2007 in the mid to upper teens, and eventually increasing its distribution as its business continues to expand. Just Energy is a strong buy up to USD14 for investors of all stripes who don’t already own it.

What can go wrong at Cineplex and Just Energy? Cineplex has no debt coming due until 2012, so it’s wholly protected against a freeze in credit. Just Energy would only need to access credit markets to make another acquisition. Moreover, neither company suffered from interest cost pressure during the 2008 credit freeze.

Both companies would benefit from continued growth in the Canadian economy. Just Energy would do well if the US economy continues to crawl back also. But both proved in 2008-09 that their businesses are a lot more recession-resistant than they seem at first glance.

Just Energy’s success is based on solid management of risks including volatile commodity prices, currency values and interest rates, as well as bad debt expense. Were they to falter at this core competency, it would certainly be cause to sell. Fortunately, first-quarter earnings indicate management is actually continuing to reduce risk. For example, the Hudson acquisition closed last month adds markets that will sharply limit the current seasonal fluctuation in revenue and cash flow.

As for Cineplex, management proved during the recent recession that people will still go to movies that are worth seeing. And with its innovations in advanced screenings and access to the best entertainment–in part by virtue of its size–it’s continued to do just that. Again, we’ll take our cue from the numbers. But the numbers give us every reason to expect more of the same successes come what may in the economy.

US investors who hold these trusts outside an IRA will probably see their tax rates rise next year, as they will for all dividend-paying equities. Canadians dominate their ownership, however, so there’s unlikely to be much selling related to rising US tax rates.

For more information on Cineplex and Just Energy see How They Rate. Click on the TSX symbol to go to their Google Finance pages for a wealth of information, ranging from news releases to price charts. These are substantial companies that trade frequently in both the US and Canada. Cineplex has a market cap of CAD1.1 billion and Just Energy’s is nearly CAD1.7 billion.

Some states have “blue sky” laws that may not allow your broker to pitch these companies to you. Those laws, however, don’t prevent you from placing the order. If your broker won’t take the trade, take your business somewhere else. A discount house like E*Trade will charge you a whole lot less for trading with them as well. US investors are generally not permitted to take part in secondary offerings, but that has nothing to do with shares that are already traded either on the Toronto Stock Exchange or over the counter (OTC) in the US.

Click on the trusts’ names to go directly to their websites. Cineplex is listed under Business Trusts, while Just Energy is tracked under Gas/Propane. 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 generally be carried forward to future years. Form 1116 recovery will also be possible after these trusts convert to corporations.

If held in IRAs, both trusts’ distributions will be exempt from Canadian withholding once they convert to corporations. That won’t happen until Jan. 1, 2011 for Cineplex and until late 2010 at the earliest for Just Energy.

At that point, however, the effective yield for both will rise 17.6 percent for US IRA investors, as both have pledged to convert without cutting dividends. For more information on IRAs and withholding, see recent Canadian Currents articles in the CE archives.