Questions About Dividend Have Spook New Flyer Investors. Why I'm Holding!

The Payout

The New Flyer income deposit security (“IDS”) consists of one common share and a C$5.53 principal 14% subordinated note.  The monthly distribution currently consists of a C$0.03298 cash dividend and a C$0.06453 interest payment on the note, for a total monthly distribution of C$0.0975.  At the closing share price $7.79 on June 10th, that's a 15% yield. 

Unfortunately, the increasingly competitive environment means the company will need to cut payments to IDS holders.  Investor worries surrounding the upcoming decision seem to have driven the recent price drop from the C$11.50-12.00 range to the current price below C$8.

Strategic Options

New Flyer's board is in the process of evaluating a number of strategic options, both to better cope with the cyclical nature of the industry and the unsustainable distributions. 

No matter what the structure, New Flyer is an excellent value company at the current price.  I like the income security nature of the current structure, and would be happy to hold the New Flyer IDS at current prices even if the dividend is reduced to zero, but I'd also be comfortable if New Flyer converts to a more traditional equity structure. 

If the current IDS were somehow converted into straight equity trading at the same price (C$7.79), the P/E ratio would be about 8, after taking into account the reduced earnings due to the loss of the interest tax shelter!


The Q1 2011 book value per share was US$2.36 or C$2.32, so the combined book and principal value of an IDS is C$7.85, above the current stock price.  For a company that will almost certainly continue to pay the interest on the subordinated note until the notes are called,  this seems like a bargain.  The interest payment alone amounts to a 10% yield at C$7.79!