Exactly two weeks after it announced an April dividend of CAD0.07 per share, payable on May 15, 2013, Extendicare Inc (TSX: EXE, OTC: EXETF) slashed the May payment to be made June 15 to CAD0.04, making it the sole member of the Canadian Edge How They Rate coverage universe to cut its payout last month.

Extendicare has been on the Dividend Watch List since December 2012 because of its exposure to an increasingly uncertain US health care market, which accounted for more than 60 percent of fourth-quarter 2012 revenue and earnings before interest, taxation, depreciation and amortization (EBITDA).

Management attributed the 42.8 percent reduction to changes in the US operating environment, including significant cuts in government funding, increases in alternative care and increased regulation.

“The company’s US cash flow will principally be used to enhance operations, provide financial flexibility and become responsive to future changes in funding,” President and CEO Tim Lukenda said in a statement announcing the move.

The new rate will allow Extendicare “to be adaptable to an evolving US health care marketplace” and gives the company “strength and flexibility…to navigate uncertainty in the near term.”

Even more unsettling, if that’s possible, is that management said in the same announcement that it expects to report first-quarter funds from operations of CAD0.17 per share and adjusted funds from operations of CAD0.21 per share when it posts numbers for the first quarter of 2013 on May 9.

By contrast, Extendicare generated adjusted funds from operations–the best measure of the business’ underlying health–of CAD0.312 during the fourth quarter of 2012. That figure covered the old CAD0.07 monthly dividend by a 1.49-to-1 margin, the equivalent of a 67.3 percent payout ratio.

First-quarter guidance is based on “continuing U.S. economic weakness resulting in reductions in both funding and census,” or the number of residents in its senior care centers.

Based on the new CAD0.04 rate and management’s adjusted funds from operations per share guidance of CAD0.21, the coverage ratio would be 1.75-to-1, the payout ratio 57.1 percent. That certainly measures up to Mr. Lukenda’s assertion that the cut “is consistent with Extendicare’s philosophy of maintaining a conservative payout level.”

Management has at least resolved the question of how Extendicare is coping with the unsettled US health care system, and that, apparently, is “not well.” The guidance downgrade as much as the dividend cut support this conclusion.

At the same time, however, a dividend reduction, so long as the cash saved is put to good use, such as debt reduction or productive investment in the business, is not necessarily a death knell for a stock.

We’ve seen plenty of cases where cuts have actually paved the way to longer-term growth–for share prices as well as dividends. But Extendicare has now become a “show-me” situation, and we’ll have to see the details of its first-quarter report to fully understand the depths of the US deterioration before making a definitive call on the stock.

In the meantime, this is no time for anyone to try to “average down” their cost basis by adding new shares with the stock trading at a four-year low. Nor should new money step until we see operating and financial results for the first three months of 2013.

Based on the new annualized dividend rate of CAD0.48 per share and a May 1 close of CAD5.45 Extendicare is priced to yield 8.8 percent. But we want to be clear that this new payout platform is stable and that the cash saved will allow the company to get on a new path to growth.

The new payout policy is conservative at these levels, as management notes, but questions about the US health care system–how it’s funded as well as what the impact of continuing economic uncertainty will be on consumers, suggest discretion is the better part of valor right now.

Extendicare is a hold pending the release of first-quarter 2013 financial and operating results on May 9.

Here’s the rest of the Dividend Watch List. Not all members are sells, though the most conservative investors should avoid the lot of them.

Bonavista Energy Corp’s (TSX: BNP, OTC: BNPUF) ability to fund development plans and support the current dividend rate have likely benefitted from improving natural gas prices. The key is management’s ability to lock in pricing for future production and establish a solid and predictable cash stream.

Management will report first-quarter 2013 results on or about May 3. Hold.

Cathedral Energy Services Ltd’s (TSX: CET, OTC: CETEF) Production Testing unit is holding up relatively well, and the Directional Drilling segment will likely post sequential and year-over-year improvements due to favorable comparable numbers, as activity in the US is picking up and seasonal factors in Canada are working to its advantage.

It’s still a volatile environment for Energy Services firms, and the company is coming off a fourth quarter where funds from operations declined by 61.7 percent. Management will report first-quarter 2013 results on or about May 7. Hold.

Chorus Aviation Inc (TSX: CHR/B, OTC: CHRVF) management has said that it’s “comfortable” with the current dividend policy but also noted that the rate is subject to review. The biggest factor continues to be the ongoing negotiations with Air Canada Inc (TSX: AC/A, OTC: AIDIF).

During its fourth-quarter and full-year 2012 earnings conference call management also backed off what it had described as its “worst-case scenario,” one that provided support for the current CAD0.15 quarterly payout.

Bay Street is mildly bullish, as Scotia Capital recently boosted the stock to “sector outperform” from “sector perform” to bring its buy-hold-sell line to four-two-one. Apart from the Air Canada uncertainty, however, competition is taking a toll. Management is tentatively scheduled to report first-quarter 2013 results on May 10. Sell.

CML Healthcare Inc (TSX: CLC, OTC: CMHIF) announced in January a plan to sell its diagnostic imaging business, with a goal of completing the divestment by the end of 2013. Management said at the time of the original announcement that it had started talks with prospective buyers, some of whom have expressed interest in the entire portfolio, some of whom are interested in particular provinces, some of whom are interested in regions within particular provinces.

There could be a single deal announced at once or several revealed in series. Financial and operating numbers have been steady over the past two quarters. Another set of solid numbers supportive of the reduced dividend level will earn CML an exit from the List. Management will report first-quarter 2013 results on May 8. Hold.

Data Group Inc’s(TSX: DGI, OTC: DGPIF) share price surged from an all-time closing low of CAD1.65 on Feb. 27 to CAD2.48 on March 8 on significant volume. But it’s back down to CAD2.03 as of May 1, as questions remain about any business attempting the transition from print to digital.

The new quarterly dividend rate of CAD0.075 per share will allow more debt reduction and business investment than the old monthly rate of CAD0.0542 per share. But the issue here is more fundamental. Management will report first-quarter 2013 results on or about May 9. Hold.

Eagle Energy Trust(TSX: EGL-U, OTC: ENYTF), a recent addition to the How They Rate coverage universe, is already seeing its dividend under pressure as a small producer in a tight environment.

But fourth-quarter results were basically in line with expectations, the payout was covered and debt-to-cash flow is a modest 1.1-to-1. Management will report first-quarter 2013 results on or about May 10. Hold.

Extendicare Inc’s (TSX: EXE, OTC: EXETF) place on the List is explained above. Hold.

FP Newspapers Inc (TSX: FP, OTC: FPNUF) reached an agreement with labor unions and contract delivery carriers that will result in modest pay increases over the next four years. At the same time, however, circulation figures continue to decline, and advertising revenue is volatile.

A shrinking business with rising costs is not long to support the current dividend rate. Management will report first-quarter 2013 results on or about May 15. Sell.

Freehold Royalties Ltd (TSX: FRU, OTC: FRHLF) saw more drilling on its land during the fourth quarter of 2012, as volumes were up by 22 percent. But weaker prices hurt the bottom line.

Free cash flow covered the dividend, and management actually reduced debt as well. There’s little margin for error here, but narrowing differentials for oil in Canada should have helped first-quarter 2013, which will be reported on May 15. Hold.

GMP Capital Inc(TSX: GMP, GMPXF) has only the barest support on Bay Street, with four analysts rating the stock a “hold,” one rating it a “sell” and none rating it a “buy.” Macquarie raised the stock to “neutral,” the equivalent of “hold” according to Bloomberg’s standardization of analyst-speak, in the aftermath of the company’s purchase of a 24 percent stake in Imvescor Restaurant Group Inc (TSX: IRG, OTC: IRGIF).

Numbers for the fourth quarter of 2012 were solid, thought the impact on the dividend of this relatively significant investment is unclear. Management will report first-quarter 2013 results on May 3. Hold.

IBI Group Inc(TSX: IBG, OTC: IBIBF) management set “cautious” guidance of 4 percent field volume growth to CAD363 million from CAD350 million in 2012, as global economic uncertainty continues to the operating picture for this urban planning, design and engineering firm with activity all over the world.

IBI cut its annualized dividend in half as it transitioned into 2013, and its fourth-quarter and full-year 2012 results left Bay Street wanting. Management will report first-quarter 2013 results on May 9. Buy under USD8.

Labrador Iron Ore Royalty Corp (TSX: LIF, OTC: LIFZF) has hired its own advisers to study strategic alternatives following Rio Tinto Plc’s (London: RIO, NYSE: RIO) announcement of a plan to study its Iron Ore Company stake. The shares have jumped on a potential sale.

The fate of the dividend is tied to what happens with the facility that generates Labrador’s cash flow. But if it sells itself all questions are answered. Management will report first-quarter 2013 results on or about May 3. Hold.

Manitoba Telecom Services Inc (TSX: MBT, OTC: MOBAF) faces the challenge of overcoming better-capitalized rivals in the upcoming auction of wireless spectrum in Canada. It also has a growing pension-funding deficit that it continues to perpetuate–all within Canadian law–so it can post inflated free cash flow numbers.

Revenue for 2012 was down versus 2011, and management has guided to lower earnings for 2013. Management may argue otherwise, but MTS certainly merit inclusion on a List dedicated to watching dividend safety. Management will report first-quarter 2013 results on May 9. Sell.

New Flyer Industries Inc’s (TSX: NFI, OTC: NFYED) first-quarter 2013 orders reached 2,004 equivalent units, the highest level since the fourth quarter of 2008 and the fourth consecutive sequential increase.

Free cash flow did cover the dividend for the first time in a while in the fourth quarter of 2012, but order volume dropped by 17.7 percent and average selling prices dipped by 3.9 percent. And the key driver of revenue–government spending–continues to be constrained all over North America. Management will report first-quarter 2013 on or about May 9. Hold.

Northland Power Inc(TSX: NPI, OTC: NPIFF) announced acquisitions of a natural gas-fired and a biomass-fired power plant in April, demonstrating it has the balance-sheet strength to continue to grow. The plants should add to cash flow in the second half of 2013.

Management still concedes, however, that the dividend won’t be covered by free cash flow until 2014. Northland will report first-quarter 2013 results on May 8. Hold.

Parallel Energy Trust’s(TSX: PLT-U, OTC: PEYTF) fourth-quarter payout ratio is unsustainably high at 139 percent of distributable cash flow, and this small producer cut its payout as recently as January.

It’s for risk takers only. Management will report first-quarter 2013 results on or about May 15. Hold.

Precious Metals & Mining Trust(TSX: MMP-U, OTC: PMMTF) has been paying out a high distribution despite the fact that the 93.67 percent of the closed-end fund’s holdings that are gold and silver miners have generated zero investment income over the past year.

There are far better ways to play a rebound in gold and silver prices, including solid individual mining companies such as Barrick Gold Corp (TSX: ABX, NYSE: ABX) that are covering their payout. Sell.

Ten Peaks Coffee Company Inc (TSX: TPK, OTC: SWSSF) is adding market share on solid performance in the US, where volumes have grown 35 percent over the past three years.

But coffee is a tough, volatile business, and it’s a hard model on which to base a dividend-paying business. Management will report first-quarter 2013 results on or about May 10. Sell.

Wajax Corp’s (TSX: WJX, OTC: WJXFF) fourth-quarter earnings weakened, as sales fell to reduced drilling in the energy patch. Management guided to a second-half 2013 recovery, and Bay Street is hanging in on that basis.

But if conditions get bad enough the company hasn’t been shy about reducing distributions until conditions improve. Management will report first-quarter 2013 results on or about May 8. Hold.

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF) cut costs during the fourth quarter of 2012 due to improved scale. Narrowing price differentials during the first quarter should result in first-quarter numbers that look good by comparison to the prior corresponding period.

But Zargon remains a small producer that will be particularly susceptible to price fluctuations. Management will report first-quarter 2013 results on or about May 15. Hold.