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A Safe Way to Invest in Canadian Oil Sands

A Safe Way to Invest in Canadian Oil SandsWhile no developed nation came out of the Great Recession unscathed, some did emerge in a far better position than other major developed countries.

One of those is our neighbor to the north… Canada.

In fact, I think Canada is one of the single best places investors can invest in order to diversify their portfolio and earn compelling returns.

(It’s easy to buy Canadian stocks — most of them trade as either American Depository Receipts (ADRs) or over-the-counter in the United States.)

A number of factors have contributed to Canada’s economic resilience. First, natural resources — including the production of energy commodities, metals mining and forestry, which account for nearly 12% of the country’s GDP.

While the collapse in prices for crude oil and most industrial metals during the heart of the financial crisis hurt this segment of the economy,commodity
prices rebounded quickly in 2010 and 2011.

And, unlike the United States, Canada’s housingmarket didn’t collapse in 2008. In fact, modest income growth has continued to power activity in this sector in recent months.

Canadian banks have generally been less aggressive lenders than their U.S. counterparts, and Canadian regulators required banks to hold more capital to support their loans at the dawn of the crisis in 2007.

That means that as global credit conditions deteriorated, Canadian banks were less vulnerable to mounting bad loans and problem debts.

And Canadian companies also have a history of paying larger dividends than their peers in the United States. The Toronto Stock Exchange Index offers an average yield of 3.1%, a full percentage point higher than the 2.1% average for the U.S. S&P 500.

That makes the nation’s equity markets a fertile hunting ground for income-oriented investors.

There is one company, currently yielding 5%, that has been a major beneficiary of Canada’s strong housing and natural resources economies…

is a general contractor in Canada, focused on non-residential construction, including industrial, institutional, commercial and retail projects.

Bird has historically been a market leader in construction projects related to Canada’s energy industry and, in particular, construction activity surrounding Alberta’s oil sands.

As energy prices tumbled in late 2008 and early 2009, most of the big Canadian energy producers, including Suncor Energy Inc. (NYSE:SU) and EnCana Corporation (NYSE:ECA), slashed their capital spending budgets and delayed or canceled planned production expansion projects.

In particular, profitably producing crude from the oil sands region of Canada requires relatively high oil prices. It’s estimated that when prevailing prices fall much below $70 per barrel, investment activity slows.

In December 2008, oil prices fell into the mid-$30s per barrel, down from nearly $150 per barrel in the middle of 2008. Bird’s energy construction business went from boom to bust in a matter of just a few months.

But Bird’s management team handled that historic crisis well, beefing up the company’s institutional business to offset the decline in its energy-focused industrial group. Institutional projects include the construction of schools, government buildings, law enforcement training facilities and other public works.

Just as in many other countries around the world, Canada stepped up public works spending during the economic downturn to help stimulate the economy, and Bird took advantage by bidding on many of these profitable deals.

For the most part, these institutional projects are conducted as public-private partnerships (PPP) where private companies share the risk and receive significant support from the Canadian national or provincial governments.

In the most recent fiscal year, the institutional business unit accounted for 58% of Bird’s total revenues, compared with just 31% for its industrial business, a unit that includes energy-related projects.

Over the past three years, Bird has boosted its payout at an 11.3% annualized pace. And in April 2012, the company boosted its monthly payout once again by 9% from C$0.055 per month to C$0.06 per month. At current prices, Bird yields roughly 5%.

Management has indicated that it will continue to bid on government PPP contracts, but this market is expected to slow as the government’s stimulus efforts wind down.

Fortunately, the even more profitable industrial and energy business is enjoying the beginnings of yet another boom that kicked off in the second half of 2011. In fact, in its annual results released back in early March, Bird indicated that its oil sands construction business is likely to move back to pre-2009 levels in 2012.

With Brent Crude oil prices continuing to hover above $105 per barrel, and U.S. West Texas Intermediate around $90 per barrel, activity in the oil sands region, where Bird is a major player, should continue to ramp up and make this a great international dividend payer to own.

Risks to Consider: A renewed downturn in commodity prices in late 2012 sparked by concerns about global economic growth could reverse the pending upturn in this business.

Action to Take –> Leveraged to Canada’s recovering oil sands industry and with a long history of raising dividends each year, Bird Construction rates a buy under C$15.50 on the Toronto exchange and $15.50 for those buying the U.S.-traded over-the-counter shares.

This article was originally written by Paul Tracy, and posted on StreetAuthority.

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