Investors will have to wait until May to get more clarity on Bell Aliant Regional Communciations Income Fund's plans to convert to a corporation.
However, based on estimates from the Street, one thing is already for sure. The wireline company's current distribution will need to be cut.
Yesterday, Bell Aliant released inline fourth quarter results and guidance for 2010, including a distributable cash estimate of between $750 – $790-million, which equates to a $2.90 per share payout this year. Management said it will announce its post-conversion dividend policy in May, after one more quarter of economic and competitive visibilty.
"While we view the current 10.9% yield as attractive, investors should
be aware that while we expect the distribution to be cut to $2.60/share in 2011 from $2.90 in 2010, the new distribution rate is
not sustainable in the long term," said Maher Yaghi, analyst, Desjardins Securities.
"While Bell Aliant is not expected to pay much in cash taxes until 2013, a tax run rate of 27% beyond that time will require a further distribution cut."
Mr. Yaghi estimated the distribution will need to be cut to a range of roughly $2.10 to $2.20, resulting in a yield over the long term of about 8% based on the current unit price.
Overall, Mr. Yaghi said his thesis remains unchanged for Bell Aliant. He maintained his Hold rating and trimmed his price target to $26 from $27, saying the unit price currently represents fair value.
Based on a similar assumed effective tax rate, Phillip Huang, UBS analyst said Bell Aliant has the capacity to support dividend payments of $2.25-2.50 per share.
"This would imply a yield of 8.6%-9.5%, which would be more attractive than MBT's 7.9% yield," he wrote, reiterating his Neutral recommendation and $25.50 price target.
Meanwhile, Michael Mills, Beacon Securities analyst, told clients he expects an annual dividend in the range of $1.80-$2.00 per share starting in 2011, "despite the ability to shelter tax for the first couple of years."
He maintained his Hold rating, and 12-month price target of $26.