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The Yellow Pages cash machine is running out of gas.

After years of churning out steady distributions for its owners, there's a growing realization that the mighty Yellow Pages Income Fund will soon bow to economic and fiscal realities and cut its payout.

The changing fortunes of Yellow Pages show no company is immune to the realities of this downturn. The phone directories monopoly has a well-deserved reputation for strong performance; it's well run, has an enviable touch with acquisitions, and is gracefully navigating the move into electronic media.

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However, there's no escaping the fact that the economy is slowing, and with it, the advertising spend at Yellow Pages. And that translates into a tension reflected in the unit price and distribution policy, as the media company is doing business in the nasty world of 2009, while handing out money like it's still the boom times of '07.

Yellow Pages pays out $1.17 per unit each year in distributions, or a total of $600-million. In breaking down the company's outlook and balance sheet in a report on Wednesday, BMO Nesbitt Burns analyst Tim Casey concluded that Yellow Pages faced "unattractive options," of either raising expensive debt or cutting that payout.

"With a yield of 20 per cent, it can be justifiably argued that investors have priced in some cut to distributions," said Mr. Casey.

It can also be justifiably argued that many investors were blissfully unaware of just how grim the outlook had become until Mr. Casey weighed in. Yellow Pages units dropped by 15 per cent Wednesday after the BMO Nesbitt Burns report, with 7.8 million units changing hands on the TSX, three times the average trading volume.

The yield on Yellow Pages units is now 23 per cent - that's a flashing red warning light for anyone relying on this holding for income.

Looking ahead, Mr. Casey forecasts Yellow Pages revenues and EBITDA - earnings before interest, taxes, depreciation and amortization - will essentially be flat for the next three years. That projection seems logical, even optimistic, given the expectation for cuts in advertising in the recession.

On the financing front, Yellow Pages must retire $600-million of relatively cheap debt over the next two years - Mr. Casey pegs current interest rates at 5 per cent - and strike new credit agreements. Higher interest costs on that new debt will likely drain an additional $20-million a year.

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And the trust sector loses its tax efficient status in 2011, which BMO Nesbitt Burns says will translate into a $139-million tax bill that year for Yellow Pages.

Something has to give, and the sky-high yield on Yellow Pages units indicates that investors think the company will compensate for falling cash flow by chopping distributions. CEO Marc Tellier could probably cut the distribution in half, and not hurt the price of units, as a 10 per cent yield is more typical for a high quality trust in troubled times.

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