Question about CANROYs

**sysysy** Thu Jan 18, 2007 1:53 pm

Question about CANROYs
Hi Blaster,

I just wonder if we like energy so much, why don't we expose ourselves on some of the CANROYs, namely, AAV, ENT, ..., etc.
We can collect nice (so far) divident as well as enjoy the stock appreciation. Check out how AAC did for the past five years.

Of course, we have to take the possible tax issue announced last Oct. into account.

What are the potential risks?

Thanks!

**blast_investor** Fri Jan 19, 2007 2:00 pm

Hi sysysy:

I was less interested in CANOY before due to valuation basis. It used be that CANOY had very high PE while its dividend yield was high.

Now, the CANOY stock prices have dropped to a more reasonable level out of concern of Canadian taxation on royalty trust issue. Even without tax issue, CANOY stocks such as ENV and AAV in my opinion now have reasonable valuation, but not a big bargain there.

The dividend rate of 17% or something is misleading number because CANOY historically pay more dividend than they could earn on earning power per share basis. That is why you see earning per share for CANOY sometimes is $1 per share, but CANOY can pay $1.8 per share dividend, more than it can earn in real earning power basis, $0.80 cents extra per share dividend is simply reflecting return of principal. We value CANOY stock by PE (adjusted by one time items), not by dividend rate.

The discrepancy of dividend rate and earning per share is due to the fact of declining production on most oil fields. Most oil fields production are declining every year, around 1% to 10% per year depending on the age and nature of oil wells. After 7 to 10 years, most oil wells will be empty and dry with no oil on the reserve, and worth zero value. Oil producing reserve is the main asset investors are buying.

**blast_investor** Fri Jan 19, 2007 2:15 pm

AAV stock is such example.

AAV stock price $10.7
AAV earning per share $0.92
PE = 11.7
Dividend: $1.86
Dividend yield: 17.7%

17.7% dividend yield is misleading because AAV can only earn $0.92 per share or 8.6% earning yield. PE of 11.7 is reasonable valuation for oil stocks, but not a big bargain in oil sector.

$1.86 dividend - $.92 earning = $.94 per share return of principal.

This $.94 per share dividend extra above earning is simply a return on principal. Investors' original share of investment capital will shrink year after year as AAV continues to return the principal money to investors.

CANOY is not fully taxed by Canadian government on its income. Even without income tax right now, $0.92 per share earning for $10.7 stock AAV is not a big bargain. If Canada starts to tax CANOY in the future, this stock AAV will be overpriced and $0.92 earning will drop to $0.6 per share level.