To Be a Trust or Not To Be a Trust

Wednesday, October 18th, 2006
By Inya Ivkovic, MA for Profit Confidential

BCE Inc. has plans to become an income trust. Shareholders are ecstatic about the prospect because when and if BCE becomes a trust, its unit holders would get more bang for their money in terms of income flowing through the trust right into their accounts. But, the company’s customers have a different point of view.

An income trust is an investment vehicle capable of generating income based on its underlying asset. In the case of BCE Inc., that asset would be telecommunication and broadcasting services. As you may already know, trust units are tradable on stock exchanges and unit holders receive regular income through monthly or quarterly distributions.

But, there is an inherent problem with income trusts. Namely, if most of the money a trust earns is dispensed to unit holders as income, what, if anything, is left to invest back in the business? Well, in the case of income trusts with high yield and income payout ratios, not much makes it back into the business, which is good news for unit holders, but for customers, not so much.

As many Bell Canada customers have already experienced on their own skin, the company’s customer service leaves much to be desired. This is predominantly because the company is huge, its customer service a revolving door, and the red tape endless.

This is why it might be a good idea to try first fixing those problems while there is still some extra money around. Once BCE turns into a trust, most of its earnings will have to go to unit holders in the form of distributions. And, with the eroding customer service, the erosion of the trust’s most prized asset will also continue–its customer base!

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