Would like to get your thoughts on Noranda Income Fund. Would it be a buy? Dividend rate is decent but is it sustainable?
Look forward to your comments,
Thanks for the assignment.
This will be the second time that I explore the potential for Noranda Income Fund. The last time was March 5, 2014, on a request from John. He wanted my opinion and noted that he wasn't seeing much coverage for the units. The analysis conducted on his behalf identified that the units were trading in a range-bound pattern with resistance at $5.40 and support at $5.10. The units were trading for $5.28 and the MACD and the RSI were turning lower suggesting a retest of support. It was advised to trade NIF.UN in the range until resistance at $5.40 was resolved.
The units continued to move within the range, pulling back near support in early April before catching a lift to its 52-week high of $5.69 in early May. The advance then stalled, taking the units back to near where they were trading in early March. The release of first quarter results in mid-May, which disclosed lower sales and higher costs, added to the selling pressure.
Another audit of the charts will help identify what we might expect from NIF.UN.
The three-year chart depicts the sell signals generated by the RSI and the MACD as the units hit their 52-week high. What is also worth mentioning is that despite the retreat, the uptrend line has not been breached. The units have broken below the 50-day moving average but that seems to be a characteristic of the uptrend that started in January of 2013.
The six-month chart outlines the support that has formed at $5.20 and resistance that appears at $5.35. The MACD and the RSI are both indicating that we shouldn't expect a trend reversal just yet. What we want to see at this point is support at $5.20 holding. If $5.20 fails to hold we could see a test of the 200-day moving average.
The yield on distributions is currently 9.43 per cent which you described as decent but what has to be viewed as extraordinary in today's extremely low rate environment. The fund has paid its distribution for 29 straight months and there doesn't seem to be any indications that the board is about to curtail the practice.
However, the existing relationship between Glencore Canada and the processing facility in which the fund has an interest is set to expire in 2017, which may reduce the distributable cash available for unit holders at some time in the next three years.
NIF.UN is still a case of trading it within the established up channel.
Make it a profitable day and happy capitalism!
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Editor's Note: An earlier online version of this article did not mention the fact that a crucial contract expires in 2017 and may jeopardise distributions. This version has been updated to include that fact.