Tuesday, July 24, 2007

Yellow Pages Income Fund

Continuing my foray into Income Trusts as part of my strategy to develop a section of my portfolio that should provide stable income and some capital stability, I have initiated a position in Yellow Pages Income Fund (YLO.UN). Yellow Pages Group earns most of their revenue from advertising fees paid by companies who need exposure within their print directories that cover 97% of the Canadian population; they are Canada's largest directory publisher. They also have a burgeoning online presence with popular sites such as Canada411.ca and their 'Find Engine' at YellowPages.ca. Yellow Pages Group has also recently acquired Trader Corporation who puts out popular publications like Auto Trader, among others.

The type of revenue garnered from this ubiquitous brand-name directory is exactly the type of cash flow that I am after for relative stability of unit price and stability of distributions. S&P has assigned this trusts distributions with a SR-2 stability rating. Despite unfounded rumours of its demise, the print directory business has been consistently achieving greater than 6.5 percent organic earnings growth compounded. I believe that despite the emergence of the Internet, people will still rely on the hard copy Yellow Pages as a main source of information. Directory margins are phenomenal, always exceeding 50%.

In the online arena Yellow Pages has impressed me with their various offerings. The 'Find Engine' especially is a great tool for ever day use. Their online earnings have recently been growing at a greater than 30% clip and I don't see any reason why this should not continue given their brand name, online presence, and tie-in opportunities with the directory business (ie autotrader.ca, yellowpages.ca, various individual city sites). Of course there is enormous competition on the Internet, however this company has shown that they can deliver best in class growth and products. They are putting priority on the online strategy, while at the same time they have a stable, yet growing directory business that they are able to drawn from and cross promote.

The trust maintains a pay out ratio of just below 90% and has a proven history of raising distributions while maintaining lower debt levels (debt/equity of 0.45). Yellow Pages makes no bones about their plans to convert to a corporate structure while maintaining and increasing their pay outs come 2011. The trust is currently yielding around 7.8%. They will maintain a buffer between cash for distribution and total available cash, in order to work the taxes in. It's no surprise that this trust lays it all out, as their management team has been heralded as one of the best in Canada by several analysts.

Risks to Yellow Pages as an investment include increased use of the Internet vs. phonebook directories. So far YLO has been able to sustain organic growth rates here, but as the technology improves more people could change their habits. If advertisers flock to online vehicles instead of traditional print directories this could hurt revenues. Yellow Pages Group's Internet strategy could fall flat on its face as competitors like Google, Craigslist, etc. emerge and excel.

The consensus on this stock is currently a 'strong buy' with 6 analysts following along. Technically the stock has held up pretty well since the Halloween Massacre when it was trading around $15/unit. The stock now trades around $14, and has recently visited the $14.50 area. If I could turn back the clock this would have been an excellent trust to load the truck up with after Halloween when it tanked to $12 momentarily (where it would be yielding 9.1% today on that price).

I used the funds made available by my Petro Canada sale to fund about half of this initial purchase of YLO.UN. The trust section of our portfolio is now approximately 45% complete with about 5 months remaining until our employment income drops.


Canadian Capitalist said...

I initially established a position in YLO.UN after the Haloween surprise and increased it later when it was still trading below $13.

I agree with your analysis and while I don't discount the threat of the internet to their business, I think YPG will continue to do well. Small businesses may not want to spend the time or resources to establish an online presence and get high page ranking in Google. They could instead pay a little bit extra to YPG and get listed. For example, you can search for local restaurants and the listings in Google are powered by Yellow Pages.

Nurse B, 911 said...

I find that there are many times when I use the yellowpages because I don't have direct access or time to log onto my computer from a variety of locations. Although their indirect market share may shrink, the yellow pages still fill a valuable need. It would be interesting to see what their web-based revenues are though in comparison with traditional operations.

moneygardener said...


To answer your question:

In 2006 7.3% of their revenues were from the online segment. For 2007 that percentage should grow as they have been growing line revenue by 30% or more.

The Experts in Performance Advertising said...

How often do you find an industry that is living a technological revolution the likes of which YPG resides within (Bill Gates suggests that books will be of nil import http://blogs.zdnet.com/micro-markets/?p=1340>within 5 years to those under 50) , where it once lived as a monopoly with virtually unsurpassable barriers to entry that have been almost entirely wiped out (we don't have to print and distribute those books anymore) and is today distributing cash based on the meatiest http://www.kelseygroup.com/news/2006/globemail_060304.htm profit margin of 58%?

Yes, it's a great business to be in - I've been in it for 13 years now. And yes, YPG is well managed and is doing many things right. But - this fat cow is everyone's target, and the pickings are easy. Look at the big players entering the Canadian market in the past 18 months - http://www.kelseygroup.com/services/view-TKR-Summary.asp?DocID=1343&SFlag=No Hicks Muse with Canpages.ca and now even http://www.theglobeandmail.com/servlet/Page/document/v5/content/subscribe?user_URL=http://www.theglobeandmail.com%2Fservlet%2Fstory%2FRTGAM.20070606.wrcanwest06%2FBNStory%2FrobNews%2F%3Fpage%3Drss%26id%3DRTGAM.20070606.wrcanwest06&ord=4328373&bran Canwest entering the fray.

Just on a product note alone - tell me - would you rather spend $500 a month on an ad in a few categories in a book and maybe online, hoping for the best without really knowing what you are paying for? Yes, sure - they give out stats and more - but who do you know who looks things up in the book? Or would you rather pay just for what you actually get from your advertising?

http://www.finditincanada.ca/advertising/why_finditincanada.html Performance advertising - YPG simply cannot compete.

The association YPG seems to have with Google is one of data prodivder, and at what appears to be a 'no-money-changing-hands' scenario, used strictly as bragging rights for YPG, and to deliver such misconceptions as we see in a previous comment.

The suggestion from some that YPG can be to these generations what Bell Canada has been to past generations. My take on this is that this hypothesis will lose a lot of unsuspecting people an awful lot of money in the short term, and even more money in the long term.