Eight percent yields backed by recession resistant companies that have just posted very strong earnings: That’s a rare and extremely profitable combination in any market. And it’s what both June High Yield of the Month selections–Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) and IBI Group Inc (TSX: IBG, OTC: IBIBF)–offer.

Aggressive Holding Chemtrade Logistics saw its first-quarter profit nearly double from 2010 levels. Distributable cash after maintenance capital expenditures–the primary account from which distributions are paid–came in at CAD0.80 per unit, up from CAD0.41 a year ago. That covered the CAD0.10 monthly distribution by a 2.7-to-1 margin, a payout ratio of just 37 percent.

The results vindicate once again the operating and investment strategy of Chemtrade management in navigating the often volatile sulphuric acid business. Not only is pricing subject to economic winds. But over the past year the company has also faced interruptions in needed inputs due to a strike at supplier Vale (NYSE: VALE) as well as the shuttering of a major facility in Beaumont, Tex.

These challenges have taken their toll on profit, particularly the Beaumont outage. But Chemtrade has been able to keep paying a level distribution, just as it has every month since February 2007, a period that includes the 2008 debacle and subsequent global recession.

Now that conditions have improved so has payout coverage, providing ample cash for growth and balance sheet strengthening as well.

Higher prices for sulphuric acid were a major key to the results. That was due to a stepping up of activity in a range of industries, which also boosted volumes. The biggest winner of the company’s major divisions was Sulphur Products & Performance Chemicals, the biggest operation with customers across the industrial spectrum, which boosted cash flow 67.9 percent.

Pulp Chemicals saw a 14.7 percent jump in revenue, portending stronger results ahead, though cash flow was slightly lower on higher electricity and maintenance costs. The International division posted 42.7 percent revenue growth but also lower cash flow due to non-recurring factors. The company also continued to execute on its acquisition of Marsulex, a complimentary business, in a deal expected to close at the end of the month.

Marsulex is a leading provider of sulphur-based industrial and water treatment chemicals and services in North America. As at Chemtrade, management has made a practice of minimizing direct risk to commodity price swings, instead focusing on efficient production and throughput growth to boost profits.

The two companies’ businesses are complimentary, making the deal’s primary appeal the expansion of the customer base, product portfolio and expand geographic diversification. Management, however, has already identified CAD10 million in cost savings and other synergies for the first year after the deal’s inked. And it’s anticipating it will be immediately accretive to distributable cash flow when closed.

Looking ahead, the Pulp Chemicals business in 2011 will continue to be affected by a capital improvement program that CEO Mark Davis says will make it “a low-cost producer.” That will lift division profit later in the year, though it’s expected to limit throughput in the near term. Meanwhile, International should benefit as contracts that were delayed in the first quarter come to fruition. And the market for sulphuric acid and related products remains robust, promising further strong results that unit, by far the company’s most important.

In another major growth initiative, Chemtrade in April announced a major expansion of its production capacity for “ultra pure sulphuric acid” at its Tulsa, Okla., facility. The move comes along with a multi-year agreement with KMG Electronic Chemicals for a “specified offtake,” i.e. a guaranteed level of sales for Chemtrade. KMG is the largest supplier of high purity process chemicals to the North American semiconductor market. For the company, this deal means an immediate boost in cash flow with limited risk.

Chemtrade has elected not to convert to a corporation and is therefore now liable for specified investment flow-through (SIFT) taxes. These have been set at a rate of 26.5 percent for 2011, falling to 25 percent for 2012 and thereafter.

As management advertised many times before 2011, however, the impact on its own tax bill is nil, as it derives the majority of income outside Canada and has plenty of options to zero out levies on the rest.

In fact, CFO Rohit Bhardwaj stated in the company’s first-quarter conference call that “the Marsulex acquisition does not change this situation and we still do not expect to pay SIFT tax.”

Getting the Beaumont plant back up and running figures to be a big plus for the rest of 2011. In a business as physically dangerous and demanding as manufacturing sulphuric acid, the possibility of further plan outages certainly can’t be overlooked.

This quarter, however, the company proved its ability to absorb even this by garnering CAD8.3 million in a “business interruption insurance settlement.” And even in the fourth quarter–when the cost of the outage pushed the payout ratio to 107 percent–management was able to maintain a level dividend thanks to rich cash reserves.

Getting Marsulex into the business mix promises to take the enterprise to a new level of profitability, even as it affirms the strong position Chemtrade is in right now. And it should further insulate the company against unexpected events in individual countries, such as Japan’s devastating earthquake/tsunami and its aftermath, though management has cautioned that full integration will take time.

An overalloted CAD149.5 million security offering has apparently funded the Marsulex deal at a low cost. And finally, a CAD75 million loan maturing in August 2011 looks manageable, at just 17 percent of market capitalization, and may actually result in some interest savings, given the company’s improved financial health.

IBI Group’s first-quarter numbers were equally strong. Despite one less available working day than the average quarter, revenue of CAD77.8 million was up 14.2 percent to the highest quarterly level in company history. Cash flow rose 15.4 percent, as cash flow margins ticked up to 13.5 percent of revenue from 13.4 percent last year. Distributable cash flow coverage of the dividend was a solid 1.17-to-1, up from 0.89-to-1 last year.

Profit levels were slightly lower than during last year’s fourth quarter. But successful acquisitions and organic (non-acquisition) led growth nonetheless pushed up revenue, which should be a spur to profit for the rest of the year.

Some 67 percent of the revenue from the company’s now 5,500 active projects worldwide is public sector related. That’s also true of order backlog.

Larger deals in progress include major health care facilities, a large number of educational facilities, transit and highway projects and housing developments in Canada and China.

The company also continues to gain new business with acquisitions. The purchase of CSM Engineering in late 2010 added a great deal of expertise and potential customers in the Fort McMurray area of northern Alberta. Development of this area is again heating up after a two-year-plus lull, as high oil prices have induced leading developers to again step up to the plate.

That promises to boost private sector orders’ share of revenue going forward. Meanwhile, the March 2011 purchase of Bay Architects of Southeast Texas has further honed IBI’s competitive edge in design services for educational facilities on a global scale, including what management calls a “strategic platform for growth” in the state of Texas. This sub-sector has proven to both recession resistant and set for strong growth.

As for the balance sheet, last month the company inked a new five-year deal to expand its credit line to CAD120 million. Provisions include reduced interest costs, greater flexibility with financial covenants and enhanced capability to make acquisitions up to a total of CAD200 million. Such loans are used primarily to make acquisitions, with IBI later permanently financing deals with longer-term debt or equity. The company now has no significant debt maturities until 2016.

What could go wrong at Chemtrade and IBI? The business of winning infrastructure design contracts is robust in much of the world. The budget debate in the US, however, has resulted in fewer contracts and questions about existing ones. Meanwhile, regulatory delays in the UK also cost some revenue.

Exposure to fickle government policy comes with the territory in the public sector infrastructure business. And tight budgets in many areas will both constrain new contracts and force the company to compete for those that are available. Moreover, housing in the US–once a solid source of cash flow–has dried up, with little sign of revival.

Fortunately, as Chairman Phil Beinhaker noted in the company’s first-quarter conference call, IBI is “anticipating intensified level of work for the second, third and fourth quarter going forward,” citing increasing backlog and contracts that extend beyond 12 months at “millions of dollars per week.”

The company won its first major contract in South Africa this spring. And the automotive industry in the US has emerged as another key source of revenue, as General Motors and Chrysler embark on what Beinhaker calls “major programs of refurbishments and reorganization of physical plant for production of new product lines.”

Overall, IBI has affirmed its target of 15 percent order growth, two-thirds of which will be fueled by acquisitions and the rest by organic growth at existing businesses. Profit margin targets, meanwhile, stand at 15 percent, down from a current level of around 18 percent.

Those sound quite conservative, and they’re what the current level of dividend is based on.

In Mr. Beinhaker’s words, the company is “still not firing on all cylinders in all parts” and “the recession hasn’t given up.” One consequence is IBI has staffed up in some areas where commensurate revenue growth has been slow in coming. To the extent they start to add business, however, those margins will rise again. It also helps that much of the new business is in areas like China, meaning the company’s wait for growth to catch up to productivity expansion may be shorter than management thinks. Then there are newly entered markets in Brazil, Eastern Europe and India, where potential is very high and costs relatively low.

The greatest risk is a large number of cancelled contracts from the public sector, followed by a global economic relapse and drop in private sector activity. A drop in growth is also the biggest risk for Chemtrade, which would then be at risk to falling demand for sulphuric acid and related products, as well as slumping prices.

Both companies, however, did prove their mettle during the 2008-09 market crash/credit crunch/recession by maintaining dividends. IBI did reduce its distribution to the current monthly rate of CAD0.092 when it converted to a corporation. But neither felt significant pressures during what was the worst of times for many companies, including sector rivals.

As for dividend policy, both IBI and Chemtrade have targeted their payouts to distributable cash flow, not earnings per share. IBI has targeted a 65 to 75 percent range by 2012, with an intermediate target of 75 to 80 percent for 2011. Beyond that, funds are used mainly to cut debt. But Mr. Beinhaker did note in the conference call that when the company again reached the “comfort zone will then be able to look at increasing our dividends and distribution.” That’s promising indeed.

Chemtrade, meanwhile, seems unlikely to move the dividend up past CAD0.10 per unit per month, at least until it completes recently announced increases in capacity and the merger with Marsulex. Management set the initial rate at a level CEO Davis once said he “couldn’t have conceived of not earning.” That conservatism is certain to prevail whenever a decision is made on future dividend growth.

Chemtrade’s greater commodity price exposure makes it best suited for the Aggressive Holdings, while IBI’s decidedly not-commodity-price-sensitive operations land it in the Conservative Holdings. Both, however, appear to have hit on a formula for prosperity in the current environment, which their managements will use to get stronger and shore themselves up against when times are less favorable.

That again is a formula for solid long-term total returns from current price levels. Note I’ve owned Chemtrade somewhat longer in the Portfolio than I have IBI, one major reason for the larger gain to date. Buy Chemtrade Logistics up to USD15.50, IBI Group up to USD15.

For more information on Chemtrade and IBI, see How They Rate. Click on company names to go directly to their websites. Chemtrade is covered under Natural Resources due to its commodity price exposure. IBI is tracked under Business Trusts. Click on their US symbols to see all previous writeups in Canadian Edge and CE Weekly. Click on the Toronto Stock Exchange (TSX) symbol to go to their Google Finance pages for a wealth of information ranging from news releases to price charts.

Both companies are small to mid-cap stocks. IBI has a market capitalization of about CAD188 million, while Chemtrade comes in at CAD444 million. Both stocks trade with good volume on their home market, the Toronto Stock Exchange. Trading is less brisk under the US over-the-counter (OTC) symbols but still more than adequate for any broker to buy and sell.

Distributions paid by both companies are 100 percent qualified for US tax purposes. IBI completed its conversion from an income trust to a corporation on Jan. 4, 2011. Dividends paid into IRAs from the Feb. 28, 2011, payment on aren’t subject to 15 percent Canadian withholding tax. Chemtrade didn’t convert to a corporation and will likely continue being withheld from IRA accounts.

As is customary for virtually all foreign-based companies, the host government–in this case Canada–withholds 15 percent of distributions paid by IBI and Chemtrade to US investors into taxable accounts. The tax can be recovered as a credit 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.