High
dividend yields? Yes, but probably not sustainable. Depends
on the future price of oil and gas. Penn West Energy Trust (PWE) and Enerplus
Resources Fund (ERF) are two of many companies in the current market offering
generous yields (13.4% and 11.4% respectively) as a result of
their falling stock prices. For these two companies, the reason they offer
large dividends is their status as energy trusts. Such firms pledge to distribute
most of their profits to shareholders in exchange for tax breaks. PWE and
ERF pay out distributions on a monthly basis. The idea of regular cash flows
holds particular appeal in a volatile market such as we currently face.
The question
is whether these companies can afford to maintain the dividends. After looking
into their financials, I see some reasons for doubt and some for optimism.
Penn West is
based in Canada and all of its land holdings are located there. In May 2005,
it changed from an exploration and production company to an income trust.
The initial distribution was $0.26 CDN per share. That number was last
raised in February 2006 to $0.34 CDN. When it reported earnings for the first
half of 2007, PWE committed to maintaining this rate at least through the
third quarter of this year.
The earnings
announcement also contained a net loss for the year so far, but this was due
to a non-cash tax charge in anticipation of a proposed Canadian tax on income
trusts that won't take effect until 2011. Tax benefits were the main reason
for corporations to become income trusts in the first place, so how exactly
the trusts react to this law and whether it causes many to restructure remains
to be seen.
PWE's cash flows (non-GAAP measure) for this year look OK, which is important
because that is what the company uses to help it set dividend levels. For
the first six months of 2007, cash flows were $637.5 million CDN, up 26% from
the previous year. The increase, though, was completely due to the 2006 merger
with Petrofund. The weighted average sales price PWE received for its
oil and natural gas output is down slightly this year compared to last,
when taken net of risk management measures (i.e hedging) . This number is
actually way down from the price received in 2005. PWE projects total
2007 cash flows of $1.3-1.4 billion CDN. (And we all thought the price of
oil was rising.)
In 2006, cash flows worked out to $5.86 per share and PWE paid out $4.05 per
unit in dividends. PWE seems comfortable with that 69% payout ratio. It believes
that leaves it with enough money left over for capital investments. Assuming
the current rate holds, distributions will end up at $4.08 for this year.
The projections mentioned above would result in cash flows of $5.43-5.85 per
unit, based on the number of units outstanding as of June 30. If the optimistic
forecasts hold, PWE will easily maintain its dividends, but if the actual
results end up closer to the pessimistic numbers, things could get difficult,
as that would lead to a payout ratio over 75%.
PWE is acting as if they have plenty of money left after distributions to
spend on growth. It is in the process of buying C1 Energy Ltd, continuing
to try to expand through acquisition. Looking at the quarterly report, however,
it appears PWE borrowed some money to help it pay its dividends this year.
The idea of a company needing to borrow to cover its dividend payouts does
not breed confidence given the tightening credit market.
The stock price itself has dropped a lot the past couple months. PWE closed
at $23.38 on Tuesday, just above its recent 52-week low.
ERF is a very similar company to PWE. It is based in Canada, though unlike
PWE it owns a bit of oil producing land in the US. Both are looking to oil
sands projects as important opportunities for the future. Their current market
caps are not far apart. ERF has been an income trust since 1986, much longer
than PWE. It closed at $40.65 on Tuesday. This was just above its 52-week
low, which it hit the same day as PWE. In fact, the two stocks have tracked
each other's movements incredibly closely, which is logical given their overlapping
businesses.
This graph -- PWE is bluish -- shows just how strong the correlation is. Since
it arises from genuine commonalities in what affects the companies' stock
prices and how, it is almost certain to continue. Thus, the returns from investing
in either company should be close. PWE offers a small edge at the moment in
dividends, with a yield of 13.4% versus 11.4% for ERF.
For the first six months of the year, ERF's cash flow from operations was
up 11% in 2007. However, like PWE, this increase was in spite of the company
receiving slightly lower prices, on average, for its oil and gas. ERF distributes
$0.42 CDN per share monthly, the same rate it has done this since late 2005.
It has not made the same stated commitment that PWE made to hold its dividends
stable. (That could be good, bad or mean nothing. I suspect it means nothing.)
The payout ratio for ERF is comparable to PWE. It is 74% for the first
six months of 2007 compared to 79% for the same period last year. The
payout ratio was 71% for all of 2006. These values sit in the middle of where
they were in the preceding years. They are higher than the numbers for PWE
because of a difference in how the two firms derive them. Performing the equivalent
calculation for PWE gives a payout ratio of 73.4% for 2006. ERF did not use
its borrowings to pay for its dividend payouts.
As I said at the beginning, there are positive signals and negative ones.
The dividend yields are generous and the stock prices seem fair. How good
a buy you think the stocks are depends largely on what you believe oil and
gas prices will do over the next several months. If they climb higher,
ERF and PWE could exceed their projections and be able to maintain or even
increase dividends. If energy prices hold fairly steady or fall (which
is what has happened recently), then energy trusts may struggle. My bet is
that the markets are telling us through these lower prices that they expect
oil to fall. If Harry's right about the possibility of a mild recession,
oil may drop even further, along with PWE and ERF.
PWE has a slightly
higher yield, a lot more undeveloped land and a more attractive price/book
ratio, but ERF has a longer track record of being a successful income trust,
better margins and a lower debt load.
Eating Made
Simple
How do you cope with a mountain of conflicting diet advice?
As a nutrition professor, I am constantly asked why nutrition advice seems
to change so much and why experts so often disagree. Whose information, people
ask, can we trust? I’m tempted to say, “Mine, of course,” but
I understand the problem. Yes, nutrition advice seems endlessly mired in scientific
argument, the self-interest of food companies and compromises by government
regulators. Nevertheless, basic dietary principles are not in dispute: eat
less; move more; eat fruits, vegetables and whole grains; and avoid too much
junk food.
“Eat
less” means consume fewer calories, which translates into eating
smaller portions and steering clear of frequent between-meal snacks. “Move
more” refers to the need to balance calorie intake with physical
activity. Eating fruits, vegetables and whole grains provides nutrients unavailable
from other foods. Avoiding junk food means to shun “foods of minimal
nutritional value”—highly processed sweets and snacks laden with
salt, sugars and artificial additives. Soft drinks are the prototypical junk
food; they contain sweeteners but few or no nutrients.
If you follow
these precepts, other aspects of the diet matter much less. Ironically, this
advice has not changed in years. The noted cardiologist Ancel Keys (who died
in 2004 at the age of 100) and his wife, Margaret, suggested similar principles
for preventing coronary heart disease nearly 50 years ago.
But I can see
why dietary advice seems like a moving target. Nutrition research is so difficult
to conduct that it seldom produces unambiguous results. Ambiguity requires
interpretation. And interpretation is influenced by the individual’s
point of view, which can become thoroughly entangled with the science.
This scientific
uncertainty is not overly surprising given that humans eat so many different
foods. For any individual, the health effects of diets are modulated by genetics
but also by education and income levels, job satisfaction, physical fitness,
and the use of cigarettes or alcohol. To simplify this situation, researchers
typically examine the effects of single dietary components one by one.
Studies focusing
on one nutrient in isolation have worked splendidly to explain symptoms caused
by deficiencies of vitamins or minerals. But this approach is less useful
for chronic conditions such as coronary heart disease and diabetes that are
caused by the interaction of dietary, genetic, behavioral and social factors.
If nutrition science seems puzzling, it is because researchers typically examine
single nutrients detached from food itself, foods separate from diets, and
risk factors apart from other behaviors. This kind of research is “reductive”
in that it attributes health effects to the consumption of one nutrient or
food when it is the overall dietary pattern that really counts most.
For chronic
diseases, single nutrients usually alter risk by amounts too small to measure
except through large, costly population studies. As seen recently in the Women’s
Health Initiative, a clinical trial that examined the effects of low-fat diets
on heart disease and cancer, participants were unable to stick with the restrictive
dietary protocols. Because humans cannot be caged and fed measured formulas,
the diets of experimental and control study groups tend to converge, making
differences indistinguishable over the long run—even with fancy statistics.
Food companies
prefer studies of single nutrients because they can use the results to sell
products. Add vitamins to candies, and you can market them as health foods.
Health claims on the labels of junk foods distract consumers from their caloric
content. This practice matters because when it comes to obesity—which
dominates nutrition problems even in some of the poorest countries of the
world—it is the calories that count. Obesity arises when people consume
significantly more calories than they expend in physical activity.
America’s
obesity rates began to rise sharply in the early 1980s. Sociologists often
attribute the “calories in” side of this trend to the demands of
an overworked population for convenience foods—prepared, packaged products
and restaurant meals that usually contain more calories than home-cooked meals.
But other social
forces also promoted the calorie imbalance. The arrival of the Reagan administration
in 1980 increased the pace of industry deregulation, removing controls on
agricultural production and encouraging farmers to grow more food. Calories
available per capita in the national food supply (that produced by American
farmers, plus imports, less exports) rose from 3,200 a day in 1980 to 3,900
a day two decades later.
The early 1980s
also marked the advent of the “shareholder value movement” on Wall
Street. Stockholder demands for higher short-term returns on investments
forced food companies to expand sales in a marketplace that already contained
excessive calories. Food companies responded by seeking new sales and marketing
opportunities. They encouraged formerly shunned practices that eventually
changed social norms, such as frequent between-meal snacking, eating in book
and clothing stores, and serving larger portions. The industry continued to
sponsor organizations and journals that focus on nutrition-related subjects
and intensified its efforts to lobby government for favorable dietary advice.
Then and now food lobbies have promoted positive interpretations of scientific
studies, sponsored research that can be used as a basis for health claims,
and attacked critics, myself among them, as proponents of “junk science.”
If anything, such activities only add to public confusion.
No matter whom
I speak to, I hear pleas for help in dealing with supermarkets, considered
by shoppers as “ground zero” for distinguishing health claims from
scientific advice. So I spent a year visiting supermarkets to help people
think more clearly about food choices. The result was my book What
to Eat.
Supermarkets
provide a vital public service but are not social services agencies. Their
job is to sell as much food as possible. Every aspect of store design—from
shelf position to background music—is based on marketing research. Because
this research shows that the more products customers see, the more they buy,
a store’s objective is to expose shoppers to the maximum number of products
they will tolerate viewing.
If consumers
are confused about which foods to buy, it is surely because the choices require
knowledge of issues that are not easily resolved by science and are strongly
swayed by social and economic considerations. Such decisions play out every
day in every store aisle.
Are Organics
Healthier?
Organic foods are the fastest-growing segment of the industry, in part because
people are willing to pay more for foods that they believe are healthier and
more nutritious. The U.S. Department of Agriculture forbids producers of “Certified
Organic” fruits and vegetables from using synthetic pesticides, herbicides,
fertilizers, genetically modified seeds, irradiation or fertilizer derived
from sewage sludge. It licenses inspectors to ensure that producers follow
those rules. Although the USDA is responsible for organics, its principal
mandate is to promote conventional agriculture, which explains why the department
asserts that it “makes no claims that organically produced food is
safer or more nutritious than conventionally produced food. Organic food
differs from conventionally grown food in the way it is grown, handled and
processed.”
This statement
implies that such differences are unimportant. Critics of organic foods would
agree; they question the reliability of organic certification and the productivity,
safety and health benefits of organic production methods. Meanwhile the organic
food industry longs for research to address such criticisms, but studies are
expensive and difficult to conduct. Nevertheless, existing research in this
area has established that organic farms are nearly as productive as conventional
farms, use less energy and leave soils in better condition. People who eat
foods grown without synthetic pesticides ought to have fewer such chemicals
in their bodies, and they do. Because the organic rules require pretreatment
of manure and other steps to reduce the amount of pathogens in soil treatments,
organic foods should be just as safe—or safer—than conventional
foods.
Similarly, organic
foods ought to be at least as nutritious as conventional foods. And proving
organics to be more nutritious could help justify their higher prices. For
minerals, this task is not difficult. The mineral content of plants depends
on the amounts present in the soil in which they are grown. Organic foods
are cultivated in richer soils, so their mineral content is higher.
But differences
are harder to demonstrate for vitamins or antioxidants (plant substances that
reduce tissue damage induced by free radicals); higher levels of these nutrients
relate more to a food plant’s genetic strain or protection from unfavorable
conditions after harvesting than to production methods. Still, preliminary
studies show benefits: organic peaches and pears contain greater quantities
of vitamins C and E, and organic berries and corn contain more antioxidants.
Further research
will likely confirm that organic foods contain higher nutrient levels, but
it is unclear whether these nutrients would make a measurable improvement
in health. All fruits and vegetables contain useful nutrients, albeit in different
combinations and concentrations. Eating a variety of food plants is surely
more important to health than small differences in the nutrient content of
any one food. Organics may be somewhat healthier to eat, but they are far
less likely to damage the environment, and that is reason enough to choose
them at the supermarket.
Dairy and
Calcium
Scientists cannot easily resolve questions about the health effects of dairy
foods. Milk has many components, and the health of people who consume milk
or dairy foods is influenced by everything else they eat and do. But this
area of research is especially controversial because it affects an industry
that vigorously promotes dairy products as beneficial and opposes suggestions
to the contrary.
Dairy foods
contribute about 70 percent of the calcium in American diets. This necessary
mineral is a principal constituent of bones, which constantly lose and regain
calcium during normal metabolism. Diets must contain enough calcium to replace
losses, or else bones become prone to fracture. Experts advise consumption
of at least one gram of calcium a day to replace everyday losses. Only dairy
foods provide this much calcium without supplementation.
But bones are
not just made of calcium; they require the full complement of essential nutrients
to maintain strength. Bones are stronger in people who are physically active
and who do not smoke cigarettes or drink much alcohol. Studies examining the
effects of single nutrients in dairy foods show that some nutritional factors—magnesium,
potassium, vitamin D and lactose, for example—promote calcium retention
in bones. Others, such as protein, phosphorus and sodium, foster calcium excretion.
So bone strength depends more on overall patterns of diet and behavior than
simply on calcium intake.
Populations
that do not typically consume dairy products appear to exhibit lower rates
of bone fracture despite consuming far less calcium than recommended. Why
this is so is unclear. Perhaps their diets contain less protein from meat
and dairy foods, less sodium from processed foods and less phosphorus from
soft drinks, so they retain calcium more effectively. The fact that calcium
balance depends on multiple factors could explain why rates of osteoporosis
(bone density loss) are highest in countries where people eat the most dairy
foods. Further research may clarify such counterintuitive observations.
In the meantime,
dairy foods are fine to eat if you like them, but they are not a nutritional
requirement. Think of cows: they do not drink milk after weaning, but their
bones support bodies weighing 800 pounds or more. Cows feed on grass, and
grass contains calcium in small amounts—but those amounts add up. If
you eat plenty of fruits, vegetables and whole grains, you can have healthy
bones without having to consume dairy foods.
A Meaty Debate
Critics point to meat as the culprit responsible for elevating blood cholesterol,
along with raising risks for heart disease, cancer and other conditions. Supporters
cite the lack of compelling science to justify such allegations; they emphasize
the nutritional benefits of meat protein, vitamins and minerals. Indeed, studies
in developing countries demonstrate health improvements when growing children
are fed even small amounts of meat.
But because
bacteria in a cow’s rumen attach hydrogen atoms to unsaturated fatty
acids, beef fat is highly saturated—the kind of fat that increases the
risk of coronary heart disease. All fats and oils contain some saturated fatty
acids, but animal fats, especially those from beef, have more saturated fatty
acids than vegetable fats. Nutritionists recommend eating no more than a heaping
tablespoon (20 grams) of saturated fatty acids a day. Beef eaters easily meet
or exceed this limit. The smallest McDonald’s cheeseburger contains 6
grams of saturated fatty acids, but a Hardee’s Monster Thickburger has
45 grams.
Why meat might
boost cancer risks, however, is a matter of speculation. Scientists began
to link meat to cancer in the 1970s, but even after decades of subsequent
research they remain unsure if the relevant factor might be fat, saturated
fat, protein, carcinogens or something else related to meat. By the late 1990s
experts could conclude only that eating beef probably increases the risk of
colon and rectal cancers and possibly enhances the odds of acquiring breast,
prostate and perhaps other cancers. Faced with this uncertainty, the American
Cancer Society suggests selecting leaner cuts, smaller portions and alternatives
such as chicken, fish or beans—steps consistent with today’s basic
advice about what to eat.
Fish and
Heart Disease
Fatty fish are the most important sources of long-chain omega-3 fatty acids.
In the early 1970s Danish investigators observed surprisingly low frequencies
of heart disease among indigenous populations in Greenland that typically
ate fatty fish, seals and whales. The researchers attributed the protective
effect to the foods’ content of omega-3 fatty acids. Some subsequent
studies—but by no means all—confirm this idea.
Because large,
fatty fish are likely to have accumulated methylmercury and other toxins through
predation, however, eating them raises questions about the balance between
benefits and risks. Understandably, the fish industry is eager to prove that
the health benefits of omega-3s outweigh any risks from eating fish.
Even independent
studies on omega-3 fats can be interpreted differently. In 2004 the National
Oceanic and Atmospheric Administration—for fish, the agency equivalent
to the USDA—asked the Institute of Medicine (IOM) to review studies of
the benefits and risks of consuming seafood. The ensuing review of the research
on heart disease risk illustrates the challenge such work poses for interpretation.
The IOM’s
October 2006 report concluded that eating seafood reduces the risk of heart
disease but judged the studies too inconsistent to decide if omega-3 fats
were responsible. In contrast, investigators from the Harvard School of Public
Health published a much more positive report in the Journal of the American
Medical Association that same month. Even modest consumption of fish omega-3s,
they stated, would cut coronary deaths by 36 percent and total mortality by
17 percent, meaning that not eating fish would constitute a health risk.
Differences
in interpretation explain how distinguished scientists could arrive at such
different conclusions after considering the same studies. The two groups,
for example, had conflicting views of earlier work published in March 2006
in the British Medical Journal. That study found no overall effect of omega-3s
on heart disease risk or mortality, although a subset of the original studies
displayed a 14 percent reduction in total mortality that did not reach statistical
significance. The IOM team interpreted the “nonsignificant” result
as evidence for the need for caution, whereas the Harvard group saw the data
as consistent with studies reporting the benefits of omega-3s. When studies
present inconsistent results, both interpretations are plausible. I favor
caution in such situations, but not everyone agrees.
Because findings
are inconsistent, so is dietary advice about eating fish. The American Heart
Association recommends that adults eat fatty fish at least twice a week, but
U.S. dietary guidelines say: “Limited evidence suggests an association
between consumption of fatty acids in fish and reduced risks of mortality
from cardiovascular disease for the general population ... however, more research
is needed.” Whether or not fish uniquely protects against heart disease,
seafood is a delicious source of many nutrients, and two small servings per
week of the less predatory classes of fish are unlikely to cause harm.
Sodas and
Obesity
Sugars and corn sweeteners account for a large fraction of the calories in
many supermarket foods, and virtually all the calories in drinks—soft,
sports and juice—come from added sugars.
In a trend that
correlates closely with rising rates of obesity, daily per capita consumption
of sweetened beverages has grown by about 200 calories since the early 1980s.
Although common sense suggests that this increase might have something to
do with weight gain, beverage makers argue that studies cannot prove that
sugary drinks alone—independent of calories or other foods in the diet—boost
the risk of obesity. The evidence, they say correctly, is circumstantial.
But pediatricians often see obese children in their practices who consume
more than 1,000 calories a day from sweetened drinks alone, and several studies
indicate that children who habitually consume sugary beverages take in more
calories and weigh more than those who do not.
Nevertheless,
the effects of sweetened drinks on obesity continue to be subject to interpretation.
In 2006, for example, a systematic review funded by independent sources found
sweetened drinks to promote obesity in both children and adults. But a review
that same year sponsored in part by a beverage trade association concluded
that soft drinks have no special role in obesity. The industry-funded researchers
criticized existing studies as being short-term and inconclusive, and pointed
to studies finding that people lose weight when they substitute sweetened
drinks for their usual meals.
These differences
imply the need to scrutinize food industry sponsorship of research itself.
Although many researchers are offended by suggestions that funding support
might affect the way they design or interpret studies, systematic analyses
say otherwise. In 2007 investigators classified studies of the effects of
sweetened and other beverages on health according to who had sponsored them.
Industry-supported studies were more likely to yield results favorable to
the sponsor than those funded by independent sources. Even though scientists
may not be able to prove that sweetened drinks cause obesity, it makes sense
for anyone interested in losing weight to consume less of them.
The examples
I have discussed illustrate why nutrition science seems so controversial.
Without improved methods to ensure compliance with dietary regimens, research
debates are likely to rage unabated. Opposing points of view and the focus
of studies and food advertising on single nutrients rather than on dietary
patterns continue to fuel these disputes. While we wait for investigators
to find better ways to study nutrition and health, my approach—eat less,
move more, eat a largely plant-based diet, and avoid eating too much junk
food—makes sense and leaves you plenty of opportunity to enjoy your dinner.
.
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