Dividend Watch List

Two companies in the How They Rate coverage universe cut dividends last month, AvenEx Energy Corp (TSX: AVF, OTC: AVNDF) by 22.2 percent and Colabor Group Inc (TSX: GCL, OTC: COLFF) by 30.8 percent.

Blame for AvenEx’s reduction can be laid squarely at the feet of natural gas prices, which have dropped by nearly 30 percent so far in 2012. With the exception of a short-lived spike in early 2008, gas prices have basically been declining since late 2005, when they peaked in the high teens in the wake of hurricanes Katrina and Rita.

The chief catalyst for lower gas prices is the rapid development of shale gas reserves, which hydraulic fracturing has made cheap, and the lack of infrastructure to facilitate exports of liquefied natural gas from North America. These factors have dwarfed the impact of rapid growth in demand for gas in the electricity industry, which faces a combination of high coal prices and the need to cut emissions of acid rain gases, mercury, particulate emissions and eventually carbon dioxide.

Until mid-2011 most energy producers were able to manage the long-term decline in gas prices by focusing on production of natural gas liquids (NGL) and oil, which continue to sell at premium prices. The past nine months’ decline from more than USD4 per million British thermal units to barely USD2, however, is forcing some managements to make a choice between cutting back on liquids development, rolling up more debt and cutting dividends.

Last month AvenEx reported fourth-quarter distributable cash flow that covered its payout by nearly a 2-to-1 margin, reflecting a 3 percent bump in liquids production and a 21 percent boost in oil prices. That more than offset the 15 percent crop in natural gas output, coupled with a 17 percent dip in prices from year-earlier levels.

The company has hedged just 25 percent of projected 2012 gas output, and a portion of those hedges come off in the second quarter. Consequently, to keep the payout ratio near its target range of 60 percent in 2012 AvenEx slashed its dividend to a new monthly rate of CAD0.035 from the prior rate of CAD0.045.

AvenEx’s focus on adjusting dividends to a targeted percentage of profit is very much a European rather than American way of setting payout ratios. It has the advantage of insuring there will be enough cash to keep the lights on, i.e. maintaining management’s plans for development. That’s particularly vital for a small company like AvenEx (its market capitalization as of this writing is CAD232.5 million), which only replaced 101 percent of production with new reserves in 2011.

The main disadvantage of this strategy is it tends to turn off US investors, who by and large prefer a flat rate. As a result, AvenEx shares took a dive following the cut, are underwater about 13 percent year to date and still yield nearly 10 percent at the reduced rate.

That’s cheap. But the company also realized 23.3 percent of its revenue in the fourth quarter from selling natural gas at CAD3.77 per thousand cubic feet. And until we see how much that shrinks after the hedges come off, there’s the risk revenue and cash flow could fall even harder than management now expects, threatening even the reduced dividend level.

I don’t expect to see that. But until we do get numbers, AvenEx rates a hold.

Ditto Colabor Group. I’ve moved the stock from the Conservative Holdings to the Aggressive Holdings to reflect greater earnings and balance sheet exposure for the company to economic weakness than I had previously taken into account. 

The distributor of food and related products cut its dividend by 33 percent after reporting fourth-quarter earnings that were well below management’s expectations. As I pointed out in a Mar. 22 Flash Alert, there were some high points to the results, namely another quarter of “organic” sales growth–or revenue growth not related to acquisitions. Such “comparable” sales were up 0.9 percent during the fourth quarter, a clear sign the company is holding onto customers in its Eastern Canada markets, despite tight business conditions and competition.

Where the profits really disappointed was in costs. That was partly due to the need to speed integration of operations purchased over the past year, particularly in Ontario. Margins in Canada’s most populous province should improve markedly by the second half of calendar 2012, as management implements a comprehensive centralization and cost reduction plan.

Unfortunately, the shortfall was also due to tougher business conditions and higher fuel costs. The former has made it impossible to fully pass through expenses and still keep customers, with the result that profit margins remain compressed. And management sees little possibility of appreciable improvement this year.

My attraction to Colabor is management’s long-term strategic plan of growing by consolidating smaller distributors in what’s still a fragmented industry in Canada. The bigger the company grows, the better it can control costs and take advantage of marketing opportunities. That’s the same road to growth taken by successful CE recommendation TransForce Inc (TSX: TFI, OTC: TFIFF), which has built a strong North American transportation services franchise by relentlessly acquiring smaller rivals and adding new business.

TransForce had ups and downs on the road to getting where it is now, including a steep dividend cut in mid-2008 when it converted to a corporation. But management stuck to its strategy. Eventually business conditions improved, and the stock has surged.

That’s exactly what I expect to see for Colabor. The key question is how much darker the situation becomes before the dawn. On the positive side, the company is well within its debt covenants, and there are no maturities until 2016. At that time a CAD150 million credit line will be rolled over or paid off; CAD96.2 million was drawn as of Dec. 31, 2011.

The dividend cut ensures there will be plenty of cash to finance operations and pay down debt as well as buy back stock.

Lack of debt pressures is a huge advantage for any company in this still uncertain credit environment. And it leaves management room to continue its long-term strategy of making acquisitions to gain scale.

The next set of numbers we’ll see for Colabor will be on or about May 4 for the seasonally weak first quarter. That’s probably too early to see any value from management’s accelerated integration and cost-cutting plans.

What I will be looking for is some favorable combination of a reasonably low 12-month rolling payout ratio (management targeted around 50 percent for calendar 2012 during its first-quarter conference call), progress on debt, decent “comparable sales” and verification that the company is on track to meet its revised guidance. I’ll also be encouraged by any progress regarding ongoing mergers or any new deals.

Until we get those numbers, I expect to see a lot of volatility in Colabor shares. But assuming my expectations are met, I’ll very likely restore the stock to a buy next month, with a probable target between USD8 and USD9. If the company fails on that score, I’ll almost certainly advise moving on to one of the Food and Hospitality stocks tracked in How They Rate that does rate a buy.

Until then, Colabor is a hold, for those who can tolerate the volatility we’re likely to see over the next month until the numbers come in. Note that of the seven Bay Street analysts covering the stock, three currently have a “sell,” though their average 12-month target price is actually above Colabor’s current price.

After these cuts neither AvenEx nor Colabor is on the Dividend Watch List. Meanwhile, three members from last month have earned exits without reducing dividends, thanks to generally robust fourth-quarter results and successful capital raises that eliminated debt pressures.

CML Healthcare Inc (TSX: CLC, OTC: CMHIF) has been on the Watch List since last year, when its US operations finally blew up and the architects of its “southern strategy” were forced to resign. The fact that it never had to cut dividends during the exit is largely a testament to the resiliency of its Canadian operation, which has been more than adequate to absorb the loss from the US while maintaining growth plans, a strong balance sheet and the current dividend rate.

Fourth-quarter revenue rose 2.1 percent, and cash flow moved up 6.6 percent, thanks to a 15.2 percent jump in cash flow from continuing operations, i.e, from Canada. Adjusted funds from operations, which exclude one-time items as a measure of profitability, were up 25.4 percent.

Canadian operations benefitted from a new rate agreement with the Ontario Ministry of Health and Long-Term Care as well as management’s ability to control costs at the core laboratory and diagnostic imaging operations.

And the company was able to secure a new five-year credit facility, essentially eliminating any near-term refinancing concerns while cutting interest rates and laying in funds for future growth.

It may still be a while before it returns to dividend growth. But with its payout ratio for the fourth quarter slipping to just 67 percent, CML Healthcare is again a buy up to USD10.

Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF) reported solid fourth-quarter earnings, with adjusted funds from operations (AFFO) rising 21.5 percent. Occupancy rose to 90.6 percent, fueling net operating income growth of 2.3 percent. And the company announced a CAD931 million acquisition of a seniors housing portfolio in a 50-50 joint venture with Health Care REIT (NYSE: HCN).

Chartwell’s payout ratio remains on the high side at 90 percent of fourth-quarter AFFO. But excluding a 4.5 percent increase in outstanding units to finance growth, it came in well below that mark. And management maintains such a high payout ratio is indeed sustainable, given the stable nature of sales.

The company also largely eliminated any near-term refinancing concerns with the successful issue of CAD204 million in “equity subscription receipts” and another CAD135 million issue of 5.7 percent convertible bonds with a maturity date of Mar. 31, 2018. Proceeds are more than enough to pay off loans and debt coming due this year as well as to cut interest costs when these transactions are completed.

The key uncertainty for Chartwell going forward is what happens to US medical system spending. US operations were roughly a quarter of revenue in 2011. At this point, however, the numbers back up the dividend. Chartwell Seniors Housing REIT rates a hold.

Finally, Freehold Royalties Ltd (TSX: FRU, OTC: FRHLF) is off the Watch List and now rates a hold due to two factors. First, the company recorded a fourth-quarter payout ratio of just 67 percent. Second, it did that while garnering just 10 percent of revenue from natural gas produced on its lands.

Unlike the other energy producers tracked in How They Rate, Freehold actually produces only a small percentage of what comes off its lands. Rather, the vast majority is done by third parties that pay the company a royalty based on the amount produced and the selling price of the output.

At times this production has been heavily weighted to natural gas. In the fourth quarter, however, 76 percent of wells drilled were focused on oil, up from 51 percent the year before. Drilling for oil was up 79 percent, while natural gas drilling declined 41 percent. That’s a testament to flexibility, which is a major plus for long-run dividend stability.

The chief drawback for US investors holding Freehold is that its dividends aren’t considered “qualified” for US tax purposes. With these results, however, the shares are a suitable hold for Canadian investors, and the dividend looks secure, at least barring a steep decline in oil prices and oil drilling.

Companies land on the List of endangered dividends for one or more of three reasons:

• The underlying business is weakening enough for the dividend to be at risk. This is typically due to profits lagging the payout but may also be caused if debt becomes too high to service or roll over.
• A closed-end mutual fund is paying out significantly more in distributions than it’s making with investment income, meaning dividends are being paid with leverage, sales of assets or by returning fund capital to investors.
• Companies are organized to pay distributions as “staple shares,” which are now targeted by the Canadian government for potential new taxes. Note that all staple share companies tracked in How They Rate have now issued plans to deal with new rules on staple shares, most affirming current dividend rates.

Here’s the current Watch List, which reflects all fourth-quarter and full-year 2011 earnings releases and guidance calls for 2012 as well as levels of debt as of the end of 2011.

Aston Hill Income Fund’s (TSX: VIP-U, OTC: BVPIF) current management team took over the closed-end fund Jul. 27, 2011, and has generally maintained a steady payout and unit price over that time.

On the other hand, revenue from investments dropped from CAD0.42 per unit in 2010 to just CAD0.24 in 2011 as result of reduced dividends from dividend-paying stocks in the portfolio. This was partly offset by a decline to CAD0.14 per unit in expenses from CAD0.16 a year ago. Net asset value, meanwhile, dropped 8 percent, as gains in energy stocks were more than offset by losses in financial stocks.

The fund continues to hold stocks, but investment income is increasingly from “high yield debt and are mostly denominated in US dollars,” which the fund hedges using US dollar borrowing or forward contracts. The 2011 dividend was in large part financed by realized gains from selling assets, and for Canadians it was 73 percent return of capital.

Unfortunately, US investors basically got their capital returned and paid 15 percent withholding tax in the bargain. Management can maintain this payout rate while it waits for the markets to produce better returns. But this fund’s 9 percent-plus yield is anything but secure. Sell Aston Hill Income Fund.

Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF) has now completed its reorganization, acquiring a 100 percent interest in the partnership that generates all of its income in return for minting new shares to parent Canadian Forest Products. The latter now owns 50.2 percent of Canfor Pulp Products Inc.

When Canfor converted from an income trust to a corporation last year, it cut its dividend and issued a confusing circular intimating that US investors would be automatically cashed out at conversion unless they were “qualified investors.” Since then the company has apparently relented and continues to trade in the US under the five-letter over-the-counter (OTC) symbol.

The question is if investors on either side of the border want to own the stock in this environment. In February the company cut its dividend by 37.5 percent. But global markets for pulp and paper are still highly uncertain.

We’ll know more after management reports first-quarter 2012 results on Apr. 23. Until then Canfor Pulp Products is a hold.

I sold Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) from the Conservative Holdings last year following management’s sharp reduction in 2012 cash flow guidance and dividend warning, which it issued just weeks after assuring investors all was well. Since then the company has announced fourth-quarter earnings that were basically in line with its most recent guidance.

More important, however, was management’s statement that negotiations for a new power sales contract for the Cardinal Power Plant (32 percent of cash flow) would yield something better than a worst-case result, i.e. no contract.

A dividend cut still appears all but certain, based on the numbers as well as management’s own statements. What’s not certain is whether it will be more or less than the market now expects. And the answer to that depends on the details of the new Cardinal contract with the Ontario Power Authority as well as the company’s success rolling over CAD119 million in drawn credit lines between now and mid-June.

The current yield of 16.5 percent is clearly pricing in a lot of risk. But this one is a hold for speculators only.

Chorus Aviation Inc (TSX: CHR/B, OTC: CHRVF) is also all about the outcome of ongoing negotiations, in this case regarding a dispute over the company’s cost-sharing arrangement with cash-strapped Air Canada (TSX: AC/A, OTC: AIDIF).

The parties are reportedly still trying to reach a settlement in the case, which is the second time Air Canada has attempted to amend the terms in its favor. Failing that, however, it will be up to the decision of arbitrators in ongoing proceedings, which are wholly unpredictable.

The good news for Chorus shareholders is the 16 percent-plus yield is pricing in a pretty large dividend cut, and failing that outcome the stock is likely to revisit levels it reached in late 2010 above USD5. This would be a hefty capital gain in addition to the yield. On the other hand, a worse-than-expected outcome could take Chorus down to USD2 or lower, with a CAD86 million plus bond maturity approaching at the end of 2014.

Meanwhile, WestJet Airlines (TSX: WJA, OTC: WJAFF)–which is a buy under USD16–continues to threaten Chorus’ and Air Canada’s market share. The upshot: Chorus Aviation is a hold for speculators only.

Data Group Inc (TSX: DGI, OTC: DGPIF), with a fourth-quarter payout ratio based on distributable cash flow of just 77 percent, would appear to have successfully completed its conversion to a corporation as well as its transition from a primarily paper-oriented company to a digital one.

The stock is up more than 40 percent this year, as the yield has dropped from nearly 20 percent to a little more than 12 percent and investors have shed some of their trepidation for the dividend. The 21.9 percent drop in quarterly per share distributable cash flow was entirely due to absorbing the trust tax and now corporate taxes, offset by business growth.

Management stated in the fourth-quarter earnings call last month that it continues to monitor dividend policy in the context of its strategic plans. And as we’ve seen with other print-to-digital transitions, there’s a wide divergence between successes such as Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) and failures such as Yellow Media Inc (TSE: YLO, OTC: YLWPF). That’s pretty much why Data remains on the Watch List.

But things to appear to be on the right track. The stock is cheap enough for aggressive investors to hold, though it’s well above my buy target for speculators of USD4.

Enerplus Corp (TSX: ERF, NYSE: ERF) illustrates the point that sometimes even smart, dedicated people are overwhelmed by circumstances. This may not be the ultimate fate for oil and gas producer Enerplus. But the company’s plan to boost liquids production and hold its CAD0.18 per share dividend is running up against the harsh reality of crashing natural gas prices.

The payout ratio in the fourth quarter was just 68 percent. But counting in capital expenditures to transition production to liquids, it was 221 percent for all of 2011, 153 percent including the proceeds from asset sales. The balance has had to come mostly from the company’s credit lines, which as of Dec. 31, 2011, had CAD554 million undrawn. Borrowing has already pushed Enerplus’ debt-to-funds flow ratio to 1.6-to-1 from levels of less than 1-to-1 only a few quarters ago.

Moreover, no natural gas output is hedged for 2012. That implies a steep drop-off from realized selling prices of CAD3.41 per million British thermal units in the fourth quarter. Will gains from rising output of light oil–particularly from the company’s Bakken properties–be enough to make up the difference?

First-quarter oil prices were above management’s targets, and the company has stuck to its capital spending target of CAD800 million for 2012. It’s also holding to a target of 10 percent annual production growth, entirely drawn from oil and natural gas liquids. This is balanced against the fact that natural gas made up more than 30 percent of 2011 revenue.

If management is successful holding the dividend and maintaining a stable payout ratio in the first half of 2012, I expect to see a move back in the stock to the mid-20s. If it can’t execute the stock is headed to the mid-teens, possibly lower in the near term. But even in such a case the damage almost certainly wouldn’t last long, given the reserves this company has in the ground and the proven strengths of its management team.

The growing risk that it could happen is a good reason to exit for now. Sell Enerplus.

The keys to EnerVest Energy & Oil Sands Total Return Trust (TSX: EOS, OTC: EOSOF) are the fact that this closed-end fund is consistently paying a dividend that exceeds its investment income, and that the impact of crashing natural gas prices has yet to be fully absorbed by its holdings.

Either one is a disqualifier in my view for investors. But odds are those seduced by the yield or the fund’s oil sands theme are unlikely to notice in time.

There are some interesting names in the fund’s portfolio. But throw in management expenses and we’re far better off investing in individual shares to take advantage of this major opportunity. Sell.

There’s nothing really new since Extendicare REIT’s (TSX: EXE-U, OTC: EXETF) fourth-quarter and full-year 2011 earnings announcement, which I highlighted in a Feb. 29 Flash Alert. The highlight for investors was basically CEO Tim Lukenda’s statement that results supported the distribution despite the jump in the payout ratio to 142.9 percent.

This figure included a reserve for future US litigation, for which the company self-insures. Without it the payout ratio was a far more modest 73.9 percent for the quarter and 67.2 percent for the full year.

The numbers appear to show that the company has absorbed the steep cuts in US Medicare payments by successfully implementing a cost reduction and debt refinancing plan for its US operations. The threats to the dividend now are potential future cuts in Medicare payments–possible depending on budget talks that are likely after the November US presidential election–and the company’s plan to convert to a corporation in July.

The dividend will be at risk until a new payout policy is firmly established, terms of which will likely depend on continued success of the cost reduction efforts as well as business conditions. The shares have stabilized since the earnings announcement, but the 10 percent-plus yield is pricing in risk of at least a modest dividend cut.

Until we do get clarity on the future payout, Extendicare REIT is a hold.

FP Newspapers Inc (TSX: FP, OTC: FPNUF) took a CAD13.1 million fourth-quarter charge to write down the value of its FP Canadian Newspapers LP stake. That interest basically generates all of the company’s income, and its value has dropped on sinking newspaper industry valuations and soft advertising revenue.

The good news is the dividend payout ratio based on distributable cash flow (DCF) came in at just 62 percent for the fourth quarter, as rising advertising sales offset falling newspaper subscriptions. DCF per share dropped 19.9 percent, mainly because of corporate taxes.

But the real bad news is the numbers clearly show the underlying business is still declining, and as long as that’s the case the dividend is at risk. We’ve seen companies attempting a print-to-digital conversion crack before. A dividend cut is arguably priced in here with the yield at nearly 13 percent.

What it’s not pricing in, however, is full scale erosion of the core business, which is a distinct risk for FP. Sell.

GMP Capital Inc (TSX: GMP, GMPXF) management asserts that fourth-quarter 2011 results show the company is maintaining its market position in key areas, which is its formula for rapid recovery when conditions improve.

That’s encouraging. But fourth-quarter revenue still fell 53 percent, as underwriting activity was weak and more than offset a 59 percent jump in mergers and acquisitions advisory revenue. Full-year revenue, meanwhile, dropped 33 percent, driving down return on equity (ROE) to just 7.3 percent. Excluding one-time items ROE was 9.3 percent, down from 27.4 percent in 2010.

Regarding the dividend, management maintains the current level is “prudent.” The fourth-quarter payout ratio of 200 percent, however, is clearly not sustainable. And until it does come down the dividend will be at risk. GMP Capital is a hold.

The most important factor for New Flyer Industries Inc (TSX: NFI, OTC: NFYED) is that management plans to cut the dividend by 50 percent in August, while the stock appears to be pricing in something more on the order of a one-third cut. The actual cut could well wind up worse than expected, as the company wrestles with an environment where would-be buyers of its buses are crunched by tight state and municipal budgets.

Fourth-quarter results showed some improvement in margins despite a drop in unit sales. But free cash flow was again negative, and the company no longer enjoys favorable tax status as a staple share.

The bottom line is there are a lot of headwinds here and little reason for optimism. New Flyer rates a sell.

Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF), a closed-end fund, is still paying its distributions from capital and, with mining stocks lagging, that may be the case for a while.

The stocks that make up the bulk of the company’s portfolio pay little or nothing in dividend income; the top 10 holdings accounted for more than 70 percent of the portfolio at last count and yielded a collective 0.13 percent.

Moreover, they continue to badly lag the prices of the metals they produce, which, by the way, have softened in recent months.

The fund’s price has fallen from above CAD10 per unit in early March to less than CAD8.50, largely on worries about the global economy and what might happen to metals prices if Chinese demand should slacken.

I’m not really worried that would prove to be a lasting trend. But the fund still trades at a 10 percent premium to the value of its assets, and a dividend cut would almost surely trigger a further price drop as well, possibly back toward the late 2008 lows that were less than half current levels. Sell.

I admit to having formed a judgment against Ten Peaks Coffee Company Inc’s (TSX: TPK, OTCL SWSSF) ability to pay a dividend over the long term, mainly because it’s already reduced the payout from an initial public offering rate of CAD0.1085 per month in July 2002 to a rate of just CAD0.0625 per quarter currently. That’s a haircut of 80.8 percent to date, and it’s been accompanied by a 73.2 percent decline in the share price from the IPO price of CAD10.

On the positive side, fourth-quarter cash flows still covered the current distribution. But the payout ratio of 87 percent is up from 72 percent the prior quarter, as higher sales to specialty dealers were more than offset by a sharp rise in coffee costs.

This erosion of shareholder value is nothing new. Neither is the fact that a falling US dollar has a directly negative impact on earnings. Sell Ten Peaks.

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF), an oil-focused producer, certainly has far fewer worries than gas-focused energy producers these days. The trouble with this one is costs per barrel of oil equivalent produced surged 35.6 percent in the fourth quarter over year-earlier levels. That’s largely the result of higher costs from the company’s move to emphasize oil production over natural gas.

Oil output (61 percent of total production) did rise 5 percent in the fourth quarter over third-quarter levels. The major factor enabling funds from operations to surge 19 percent from fourth quarter 2010 and 17 percent from third quarter 2011, however, was the 24 percent increase in realized selling prices for oil. That, in turn, reduced the payout ratio to 52 percent, despite a 12 percent drop in realized selling prices for natural gas.

Production expenses per barrel of oil equivalent were among the highest in the industry at CAD17.82, up from CAD13.14. This is in addition to a 52 percent boost in transportation expenses per barrel of oil equivalent and a 13 percent jump in royalties.

Risks posed by rising operating costs coupled with a likely steep drop in natural gas revenue in 2012 are why the stock trades with such a high yield, just shy of 9 percent, indicating concern about a possible cut. Even insider buying may not be as much of a positive as it first appears, as the pace has slowed markedly over the past several months as the stock price has fallen. Sell Zargon Oil & Gas.

Bay Street Beat

Rule No. 1 when it comes to playing the mergers-and-acquisitions game from an individual investor’s point of view is to never buy a company–target or hunter–you wouldn’t want to own were there no deal to be made. Rule No. 2 is “Refer to rule No. 1.”

These rules had limited utility during another quarter of declining deal-making, as company managers used cash for share buybacks and dividend increases.

Switzerland-based integrated commodities powerhouse Glencore International Plc (London: GLEN, OTC: GLNCF), however, made a lot of noise on its own, touching off speculative rallies for agriculture-focused names when it announced a USD6.2 billion offer for Canada-based grain-handling and marketing outfit Viterra Inc (TSX: VT, OTC: VTRAF) in mid-March and this after putting together the biggest deal of the period, a proposed USD90 billion merger with global mining giant Xstrata Plc (London: XTA, OTC: XSRAF).

Xstrata-Glencore would rival Australia-based behemoth BHP Billiton Ltd (ASX: BHP, NYSE: BHP) in terms of scale and diversification.

Grain-handling equipment maker Ag Growth International Inc (TSX: AFN, OTC: AGGZF), a CE Portfolio Aggressive Holding, has rallied hard on speculation that further consolidation in the global agribusiness space will eventually lead to an offer to buy the company. Solid operating results and reasonable prospects for dividend growth ahead recommend the company whether a deal is made or not.

Bay Street has taken notice of recent market activity, though reactions have not been uniform. Ag Growth currently sports a four-four-two buy-hold-sell line on Bay Street following an upgrade to “buy,” a downgrade to “underweight” and another downgrade to “underperform.” The latter two broker-speak words translate to “sell” according to Bloomberg’s method of standardizing Bay Street/Wall Street lingo.

The downgrades clearly reflect a surging stock price, as Ag Growth shares closed at CAD33.90 on Mar. 9 on the Toronto Stock Exchange (TSX) and as high as CAD41.95 on Mar. 27 during an exciting month. It’s currently trading just above its USD40 buy-under target.

The upgrade occurred the day the company posted 2011 fourth-quarter and full-year results.

Ag Growth reported fourth-quarter revenue growth of 36 percent and cash flow growth of 26 percent excluding items. Sales of commercial handling equipment were up in North America, as agribusiness customers’ preseason demand for portable equipment surged to a record.

Management’s outlook for 2012 is bullish, based on expectations for a large number of corn acres to be planted in the US as well as normal weather conditions in Western Canada, where planting was severely curtailed in 2011. The company also expects a better year at Finland-based Mepu due to moderating costs and improving margins. And it’s reducing the initial costs of recently expanded North American operations.

The US contributed 60 percent of 2011 revenue, while Canada generated 21 percent and markets outside North America produced 19 percent. Ag Growth continues to boost sales in developing world markets, including Argentina, Columbia and Latvia. Order backlog from international operations is now roughly double what it was a year ago.

Ag Growth’s financial strength is best demonstrated by its continued ability to expand its business profitably on a global basis. The company has no maturing debt until 2014 and continues to generate funds to spur growth.

The payout ratio for the fourth quarter ticked up to 75 percent because of one-time items; until it comes back down management isn’t likely to boost the dividend. Until it does, there’s no compelling reason to pay more than USD40 for the stock.

Ag Growth is a buy on dips below USD40 for aggressive investors who don’t already own it.

Here’s a rundown of Bay Street buy-hold-sell ratings Portfolio Holdings that announced quarterly results after publication of the March issue of Canadian Edge, with the average target price among analysts covering the stock in parentheses.

Colabor Group Inc’s (TSX: GCL, OTC: COLFF) disappointing results earned two downgrades (“sector underperform,” “hold”) and an upgrade (“hold”).

Conservative Holdings

• Artis REIT (TSX: AX-U, OTC: ARESF)–5–3–0 (CAD16.96)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–5–2–0 (CAD16.79)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–4–8–1 (CAD10.63)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–5–4–2 (CAD33.19)

Aggressive Holdings

• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–4–4–2 (CAD
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–1–3–3 (CAD7.67)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–15–6–2 (CAD51.35)

Tips on DRIPs

Pembina Pipeline Corp’s (TSX: PPL, NYSE: PBA) acquisition of Provident Energy Ltd is now complete. The latter’s dividend reinvestment plan (DRIP) has been suspended. The former–or the now combined company–is trading on the New York Stock Exchange (NYSE) under the symbol PBA.

Pembina Pipeline has not yet made any announcement about its intentions with regard to opening its DRIP to US investors.

Pengrowth Energy Corp (TSX: PGF, NYSE: PGH), which is replacing Enerplus Corp (TSX: ERF, NYSE: ERF) in the CE Portfolio as of this issue, sponsors a DRIP that is available to US investors, with some limitations. Information is available here.

US securities laws restrict participation in DRIPs sponsored by foreign companies that don’t register their offering with the Securities and Exchange Commission (SEC). Most plans of Canadian income and royalty trusts that do sponsor DRIPs aren’t registered under the United States Securities Act of 1933, as amended. US investors, therefore, aren’t eligible to participate.

Conservative Holding Atlantic Power Corp (TSX: ATP, NYSE: AT), which listed on the NYSE in July 2010, continues to “evaluat[e] options for a Dividend Reinvestment Program” and “hopes to have this option available to shareholders in the future.” Just Energy Group Inc (TSX: JE, NYSE: JE), which recently listed on the NYSE, has a DRIP but as of yet it is not open to US shareholders. Shaw Communications (TSX: SJR/B, NYSE: SJR) also hasn’t yet made its DRIP available to US investors.

We’ll continue to track Atlantic Power, Just Energy, Shaw Communications and any other Portfolio Holdings that indicate they’re considering or announce that they will sponsor DRIPs open to US investors.

Companies under How They Rate coverage that sponsor DRIPs open to US investors include:

• Bank of Montreal (TSX: BMO, NYSE: BMO)
• Bank of Nova Scotia (TSX: BNS, NYSE: BNS)
• Baytex Energy Corp (TSX: BTE, NYSE: BTE)
• BCE Inc (TSX: BCE, NYSE: BCE)
• Enbridge Inc (TSX: ENB, NYSE: ENB)
• EnCana Corp (TSX: ECA, NYSE: ECA)
• Nexen Corp (TSX: NXY, NYSE: NXY)
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)
• Potash Corp of Saskatchewan (TSX: POT, NYSE: POT)
• Rogers Communications (TSX: RCI/B, NYSE: RCI)
• Royal Bank of Canada (TSX: RY, NYSE: RY)
• Suncor Energy (TSX: SU, NYSE: SU)
• Telus Corp (TSX: T, NYSE: TU)
• Toronto-Dominion Bank (TSX: TD, NYSE: TD)
• TransCanada Corp (TSX: TRP, NYSE: TRP)