Let me preface the remainder of this article by saying that calling this study inept is indeed generous. Does anybody feel like they are being fattened up for the slaughter like those brokers that screamed “tech stocks forever” in late 2001?

I read a recent Financial Post article that is helping to keep the well oiled financial marketing machine running. What’s selling like hotcakes off the shelves? One only has to look at the artificially propped up TSX composite index to realize that trusts (especially oil income trusts) are the ’special du jour’. First the article attempts to provide damage control.

The recent headlines generated by business income trusts cutting payouts have led some investors to a simplified view of the world of payouts: Trusts’ distributions bad, common-share dividends good. Right?

Wrong, according to Scotia Capital’s trust analysts. They compared the payout history of business trusts against common equities since January, 2002, using the members of the Scotia Capital business trust index and all stocks in the S&P/TSX composite index.

First, have you ever known trust analysts to signal that trusts are bad during its boom? Second, that’s only 4 years worth of data! If we looked at the stock market narrowly from 1997 to 2001, everything was smelling like roses too! Using trending data to glorify study results means that the underlying fundamentals are disregarded; thrown out the window in favour of what’s looking good.

I want to also state that I am not arguing about whether payouts are better than dividends or vice versa. My gripe is with the this study’s presentation. For example:

The analysts found that “a greater percentage of trusts have maintained or increased distributions, and a lower percentage have reduced or suspended distributions, relative to common equities.”

The above statement would look very attractive to “yield chasers” - those who are looking for a high yield on their investment dollars. But it does not speak to the quality of those payouts. Quality would be an important factor for someone who’s looking to preserve their capital as well as be in the payout/dividend game for the long-term.

Does this information mean payouts are conclusively better? Does it let us know what’s 5 years down the road by looking back at the previous 4 years? The majority of this fact is due to the abundance of oil income trusts booking record profits quarter after quarter. There are also stories of business trusts paying high yields and struggling to maintain the levels for fear of investor backlash. Does the simple fact that trusts keep increasing their payout slide the scale in favour of trusts? Contrarians would caution about whether payouts have more room to go up than to go down. Why not examine the fundamentals instead of a generalization?

It is never easy to compare apples to apples when it comes to the stock market but the study has managed to say that 150 trusts in the Scotia Capital Index can be compared with the same criteria as 500 companies in the S&P Index and 300 more in the TSX Index. Let’s also throw out the idea of market correlation, industry influences and other fundamentals that need to be examined.

Often it’s easier for these studies to realize what point they want to make first, and then work towards finding a discussion point, and focusing on it to present their case. It is just like those studies that keep telling you salt is good for you, or salt is bad for you. The answer usually lies in moderation in between the two extreme views.