A Time to Hunt Value

By Roger Conrad • June 8, 2012 • In Brief

Editor’s Note: In Brief is the executive summary of the June 2012 issue of Canadian Edge. Please use it as a guide to reading the issue. — RSC

Canada’s growth prospects are “largely consistent with expectations.” That’s according to the Bank of Canada, the country’s equivalent of the US Federal Reserve. It signals both continued economic expansion in the Northern Tiger and a certain resistance to Europe’s building recession as well as apparently still jagged growth in the US.

Where Canada is somewhat vulnerable is from falling commodity prices. Crude oil joined natural gas on the downside last month, sliding from a level well over USD100 per barrel to a low of barely USD80 before rebounding slightly in recent days.

Prices of other key commodities have also moved lower, notably copper. And gold has no doubt shocked a few adherents, crashing from USD1,740 an ounce in early March to the USD1,500 to USD1,550 range last month, even as the yield on the 10-year US Treasury note has plunged to its lowest level in history.

This action is all about Asia and concerns that slowing growth there will depress demand for Canada’s natural resource bounty. And the downside has been even more exaggerated in the prices of producer stocks. This even includes companies with no direct exposure to commodity prices, such as pipeline owners.

What we’ve seen so far is pretty much the same thing the markets experienced in mid-2010 and again in mid-2011. Each of those years, early optimism faded to fears that the stock market was headed for a repeat of 2008. These fears set off waves of selling that extended off and on to the fourth quarter, when a massive rally lifted strong companies’ stocks back into the black for the full year.

There are some differences between last year and this year. Canada’s largely pro-investor Conservative Party government faces no challenge for some years. But the US is in the midst of an increasingly contentious presidential election. And a “fiscal cliff” is now enshrined in law for across the board spending cuts and tax increases.

Europe is arguably worse off now than last year, as the Continent’s larger economies are slipping either into or are perilously close to real recession.

And Asian growth–particularly China’s and India’s–has noticeably slowed, the result of government efforts to control inflation with tighter monetary policy.

The real question is if these developments will affect the stocks we own. Does a point or two of slower Chinese growth really hurt a power generator that sells most or all of its output under long-term contracts?

What about a company that has a growing digital theater business, or a real estate investment trust that relies on no one tenant for more than 5 percent of revenue?

The answer is probably “not by very much.”

Moreover, although not every company has been able to take advantage of the lowest North American corporate borrowing rates in more than half a century, most companies have eliminated the kind of near-term financing risk that blew up so many in 2008. And they’ve cut interest costs and locked in long-term and low-cost financing for growth as well.

There are still vulnerable companies, as I highlight each month in the Dividend Watch List. But with borrowing rates still at rock-bottom levels, even Canadian companies with more volatile cash flows–such as energy producers–are still able to issue long-term debt maturing in 30 years or more at rates of 6 percent or less.

In fact, almost all of the dividend cuts we’ve seen recently in Canada have been preventive measures, as companies take pains to ensure they can execute plans even if they are at least temporarily cut off from credit markets. Dividends are protected by low payout ratios, and anything management teams are doing to grow–no matter what the industry–is definitely a show-me-the-money-first proposition.

All of this is a stark contrast to the much more expansive environment we saw before the historic 2008-09 market crash/credit crunch and the recession that came out of it. And it means there’s just not enough leverage or risk taking in the system for a repeat of 2008.

The more fearful investors are, the more hunkered down they’ve become, and the less likely we’ll see anything approaching 2008’s magnitude.

That still leaves a lot of room for downside along the lines of 2010 and 2011. But as was the case both of those years, lower prices aren’t reason to bail out. They’re a potential opportunity to buy strong dividend-paying stocks at very low prices.

I’ve identified several companies in this issue that are strong bargains now. An even higher-potential way to capitalize, however, is to set buy limit orders at “dream” prices for any stock you want to own. That could mean setting a buy limit order at the lowest price reached during either the 2010 or 2011 selloffs.

AltaGas Ltd (TSX: ALA, OTC: ATGFF), for example, hit a price of roughly USD21 on Aug. 5, 2011, last year. At that level it would yield about 6.6 percent, two percentage points higher than what it does currently.

Your order may not be executed at that price. But if it is you’ll have picked up a great company whose only sin is trading down in a bad market. That’s the kind of purchase that makes for real long-term wealth-building as well as superior income streams for years to come, even if the overall Canadian market finishes 2012 lower than it started out.

Portfolio Action

I’ve made two changes to the Canadian Edge Portfolio this month, elevating hold recommendations in the Aggressive Holdings back to buys.

Extendicare REIT (TSX: EXE-U, OTC: EXETF) will convert to a corporation on Jul. 1 and continue to pay dividends at the current rate. That eliminates a considerable amount of uncertainty, as solid distributable cash flow in the first quarter produced a payout ratio of just 65 percent.

Looking ahead, there’s still uncertainty regarding US Medicare spending starting in 2013, when severe across the board spending cuts will kick in unless there’s a Washington compromise to delay them. Extendicare management is already doing what it can to plan for those cuts, including ending direct exposure to marginal and litigious markets like Kentucky.

Until there’s more clarity on those questions, the stock will be suitable only for aggressive investors. But the current yield of more than 10 percent certainly prices in plenty of potential risk. Buy Extendicare up to USD9 if you’re patient and don’t already have a full position.

The other upgrade is Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) to a buy up to USD20. The company’s first-quarter results proved once again that it’s a breed apart in the energy industry, with low costs and energy that always commands a premium price.

Despite sharply lower realized selling prices for its natural gas, Peyto nonetheless posted a first-quarter 2012 payout ratio of just 32 percent, as it boosted production 25 percent and cut costs 15 percent per barrel of oil equivalent.

It’s possible to imagine a scenario with natural gas fetching USD1 per million British thermal units or less. But even at that price Peyto’s margins are greater than 30 percent, with all costs included. That’s pretty good protection from the worst-case scenario, even as this company presents huge upside from any firming up of gas prices. Buy Peyto up to USD20.

As for the rest of the Portfolio, our commodity-focused recommendations have been extremely volatile and are likely to be so long as global slowdown worries are this poignant. But as first-quarter results demonstrated, all of these companies are thus far coping well with the pressures. That’s ultimately the key to their ability to build wealth. And while they demonstrate that strength, I will be riding out the volatility, so long as it exists.

By contrast, damage thus far to most Conservative Holdings has been quite light, with many companies still trading above my buy targets. I advise holding off on buying these until lower prices are reached, or until they do something to merit a higher buy price such as boosting dividends.

This is a good time, however, for anyone light on my Canadian energy midstream favorites to pick up shares. Those include AltaGas Ltd (TSX: ALA, OTC: ATGFF), Keyera Corp (TSX: KEY, OTC: KEYUF) and Pembina Pipeline Corp (TSX: PPL, NYSE: PBA). As in the US, energy midstream companies are frequently sold off when energy prices decline, though not nearly so much as actual producers. That’s despite the fact that our trio has little or no direct exposure to energy price swings.

Here’s where to find my analysis of first-quarter earnings for all Portfolio Holdings along with dates (estimated in most cases, confirmed in some) for the next release of quarterly numbers. For a review of non-Portfolio companies we track, see How They Rate.

Conservative Holdings

Aggressive Holdings

High Yield of the Month

High Yield of the Month features the two best buys for June. If you’re starting a portfolio, buying HYotMs each month is one good strategy, provided the picks meet your own risk/reward preferences.

This month’s choices are both Conservative Holdings involved in development of major infrastructure: Bird Construction Inc (TSX: BDT, OTC: BIRDF) and IBI Group Inc (TSX: IBG, OTC: IBIBF).

Bird’s 9.1 percent dividend increase announced in March was more than funded by its 56.1 percent increase in first-quarter net income. Order backlog hit new records, as the company continues to win a range of new public sector projects in Canada. This month already, for example, the company won a contract to construct a new prepared meat processing facility in Hamilton, Ontario with an expected completion date in 2014.

The growth of private-sector business, which is particularly heavy in the mining and energy business, is a much welcome development for Bird, which since the 2008 crash has largely relied on the public sector for new contracts. That kind of work is likely to continue, given the company’s dominant position in the market. But private-sector work is far more profitable potentially and it signals robust cash flow and dividend growth going forward for Bird.

My buy-under target is USD14.50 for investors of all risk tolerances and objectives.

IBI Group’s 9 percent-plus yield is the result of a one-day selloff that followed its release of first-quarter 2012 profits. As I related in the May 17 Flash Alert, the company fell short on a couple of its key profitability metrics, largely due to the cost of growing its business globally.

The stock has since bounced a bit and stabilized but remains well below the USD14 range it previously held. The key here is the dividend, which was still solidly covered by first-quarter cash flow with a payout ratio of 89 percent. First-quarter distributable cash flow rose 8.2 percent, project backlog reached the highest level ever in Canadian dollar terms, and management largely stuck to full-year targets for growth and profitability.

Unlike Bird, IBI is a truly global company, though much of its business is still concentrated in North America. That exposes cash flow to woes in individual countries but at the same time protects the overall bottom line from singular events. It also positions IBI to profit from infrastructure investment around the world, which ironically looks set to accelerate in several key countries.

IBI is a strong buy all the way up to USD15 for anyone who doesn’t already own it.

Feature Article

“Be prepared” is the motto of an organization I’ve been a part of for many years. Thankfully, 99 percent of the time the steps you take to get ready for the worst-case scenario aren’t ever needed. But that 1 percent of the time they can make the difference between life and death.

Fear that markets are headed for a reprise of the 2008-09 meltdown is palpable here in mid-2012. That alone makes a repeat almost impossible. There’s just too little leverage to create the same level of vulnerability as prior to that crash.

That means the volatility and downside we’re seeing now is far more likely to evolve into something resembling the action in 2011 and 2010. Now is a good time, however, to take a look at what really happened in 2008.

I recap that history, put it in context current events, and show how at risk our Canadian Edge Portfolio Holdings as well as companies elsewhere in the How They Rate universe would be to a repeat.

Canadian Currents

The Australian mining and materials sector starting selling off well before fears of another 2008-style meltdown gripped global markets. And there are values, there, too, including one stock recommended in the May 2012 In Focus feature for CE’s “Commonwealth Cousin” letter Australian Edge that was among the top five performers in the S&P/Australian Securities Exchange 200 Index from May 11 through Wednesday, Jun. 6.

Read more about that stock–unhedged gold producer Medusa Mining Ltd (ASX: MML, OTC: MDSMF)–as we bring you another preview of AE.

Tips on Trusts

This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide.

Dividend Watch List—Two How They Rate companies cut dividends last month.

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) has reduced its distribution to a rate of CAD0.075 per share per quarter. That’s a de facto monthly rate of CAD0.025, a nearly 60 percent haircut from the old rate of CAD0.055 per month. It’s also below the “best guess” I gave in last month’s Dividend Watch List of CAD0.035 per month.

The company reported 14.5 percent lower adjusted funds from operations in the first quarter of 2012, largely due to the costs from newly added businesses such as Bristol Water. Management later announced moves to recapitalize its water operations, with a portion of funds to be used to pay down the credit facility related to the Cardinal Power Plant.

Capstone still hasn’t announced a new contract for Cardinal with the Ontario Power Authority, and this move may be an attempt to deal with the potential for a worse-than-expected outcome.

At any rate, the payout ratio based on first-quarter results and the new dividend rate is just 38 percent and should be sustainable even in a worst-case for Cardinal.

My advice is still to hold the stock, but Capstone is now off the Dividend Watch List.

GMP Capital Inc (TSX: GMP, OTC: GMPXF), by contrast, is still on the Watch List, despite hacking its distribution in half. This provider of niche market and financial services on the Toronto Stock Exchange (TSX) has made herculean strides to increase its capabilities under its new CEO. And first-quarter results again confirmed it’s holding its own in key markets.

Unfortunately, market conditions for its various niches continue to be worse than management had initially contemplated. Return on equity was negative 3.7 percent in the first quarter, as revenue plunged 43 percent and the company swung into the red.

Conditions remain difficult in financial markets and are likely to remain volatile so long as Europe’s problems fester. GMP remains on the Watch List until its profits decidedly turn up.

On the plus side, the cut was priced in before hand, and the stock is up by about 10 percent since. GMP is still a hold.

Added to the Watch List this month is Labrador Iron Ore Royalty Corp (TSX: LIF-U, OTC: LIFZF). The company’s cash flow dried up in the first quarter, as the iron ore facility contributing all of its income deferred its dividend until labor strife is settled. That pushed the payout ratio out to 163 percent.

I expect Labrador’s cash flows to revive long before management is forced to consider reducing its payout. But combined with questions about future taxation of “staple share” companies such as Labrador–which combine debt with equity into a single security–it elevates dividend risk enough to urge caution. Labrador Iron Ore is also a hold.

TransAlta Corp (TSX: TA, NYSE: TAC) is also new to the List. The unregulated power producer is facing many of the same pressures as US-based merchant generators, mainly that low natural gas prices have driven down the wholesale price of electricity.

TransAlta is also a major producer of coal-fired power, which is at an increasing disadvantage to gas as a fuel source for power both on price and for environmental reasons. And its dispute with TransCanada Corp (TSX: TRP, NYSE: TRP) seems unlikely to be resolved by friendly means.

None of this necessarily means the company will cut its dividend, which it has maintained at CAD0.29 per share per quarter since early 2009. But it does elevate the risk. TransAlta is a hold.

Here’s the rest of the Watch List.  Note the List now reflects first-quarter 2012 results.

Aston Hill Income Fund (TSX: VIP-U, OTC: BVPIF) still yields far above the average for its holdings, meaning the payout is coming from capital and leverage. Sell.

Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF) still faces generally lackluster conditions in the global pulp market, though US demand looks better this year.

Failure of two recovery boilers at the Northwood Pulp Mill, however, adds another element of risk, as production has been interrupted and mitigation risk is as yet unknown. Canfor’s a hold only for those willing to take on those risks. Hold.

Chorus Aviation Inc’s (TSX: CHR/B, OTC: CHRVF) first-quarter earnings were robust. But the discount airline’s contract arbitration with cash-strapped Air Canada Inc (TSX: AC/A, OTC: AIDIF) looks set to yield a worse arrangement, draining cash flow and almost certainly forcing a dividend cut.

The only good news is a lot of bad news is already priced in at a yield of nearly 20 percent. But the most shareholders can hope for is something less bad than already appears inevitable, particularly with the looming loss of the Thomas Cook contract at the end of 2012. Sell.

Colabor Group Inc (TSX: GCL, OTC: COLFF) actually came in with decent first-quarter numbers. And it’s increasingly evident that actions taken by management of this distributor of food and related products to improve efficiency are starting to pay off, not least of which was reducing the number of major divisions to 3 from 8 previously.

The payout ratio of 63 after the recent dividend cut is modest. But until there are a couple more good quarters, the stock remains on the Watch List. Hold.

Data Group Inc (TSX: DGI, OTC: DGPIF) had a somewhat higher payout ratio in the first quarter than in the fourth quarter of 2011, coming in at 93 percent. There were positive trends, such as a 2.8 percent increase in revenue and an 8.8 percent boost in gross profit margins.

This stock still trades as though it will be the next Yellow Media Inc (TSX: YLO, OTC: YLWPF) and likely will for a while as it proves its case to investors. In the meantime, conservative investors should tread cautiously. Hold.

Enerplus Corp’s (TSX: ERF, NYSE: ERF) first-quarter numbers definitely reflect the impact of falling gas prices, and the producer is still basically unhedged. Management continues to execute on its long-run plan to move production more to oil and gas liquids but at the cost of rising debt.

The question now is whether the drop in oil prices will force management’s hand to cut the payout in the near-term, rather than wait to see how energy markets develop later in the year. Either way, there are better bets in energy producer stocks right now. Sell.

EnerVest Energy & Oil Sands Total Return Trust (TSX: EOS, OTC: EOSOF) is still paying out a dividend many times what its holdings do, and the yield is quite low in any case. Sell.

Extendicare REIT (TSX: EXE-U, OTC: EXETF) earned an upgrade to “buy” this month, as management has successfully completed a cut-free conversion to a corporation. In addition, first-quarter results demonstrate it’s adjusted to the steep cut in Medicare reimbursement to its senior care centers in the US.

The stock is still on the Watch List for one reason: We don’t know how deeply US austerity will cut in 2013 and what management will have to do to deal with it. I’m optimistic, but this stock is for aggressive investors only. Buy under USD9.

FP Newspapers Inc’s (TSX: FP, OTC: FPNUF) earnings dropped again in the first quarter of 2012, as advertising revenue remained weak. And the payout ratio ballooned to 246 percent.

Whether FP can find its way through to an Internet world remains to be seen. But so long as business is declining, there’s no real reason for anyone to hold this stock, despite the huge yield. Sell.

GMP Capital Inc (TSX: GMP, GMPXF) swung into the red in the first quarter of 2012. That’s no fault of management, which is still holding market share and expanding into new niches.

But so long as action on the Toronto Stock Exchange (TSX) is this erratic, GMP’s revenue will be challenged, and so will its dividend. Hold.

New Flyer Industries Inc (TSX: NFI, OTC: NFYED) still projects a dividend cut of 50 percent in the next few months. But the 24.1 percent drop in first-quarter cash flow clearly shows the business is in a bad way.

The payout ratio improved to 90 percent from negative the previous quarter. But there’s dividend risk here above the 50 percent reduction already announced. Sell.

Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF) is teetering on a sharp edge. Sooner or later, long-lagging mining stocks will start to outperform the prices of the metals they produce. That’s been the case for every metals bull market in history.

Unfortunately, this fund appears to be trading pretty much on high yield, which is now over 15 percent. The 20 percent-plus premium to net asset value is not only high for any closed-end fund, but is also an all-time high for the fund itself. You’re basically paying $1 for less than 80 cents of stocks.

You’re far better off buying individual stocks, particularly since a dividend cut would likely drive this fund’s price sharply lower. Sell.

Ten Peaks Coffee Company Inc (TSX: TPK, OTCL SWSSF) reported no good news with its first-quarter results, as cash flow per share plunged 97.4 percent. Processing volumes dropped by more than 12 percent, as customers postponed purchases, and costs rose 19 percent.

I’ve said it before and I’ll say it again: This is a bad business model for paying dividends. Don’t chase the yield. Sell.

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF), like most oil and gas producer stocks, is again getting pretty cheap. This one, however, has too many worrisome signs to make it a buy or even a hold.

First quarter production dived 7 percent, as operating costs rose again by 8 percent per barrel of oil equivalent produced. Realized selling prices for natural gas fell 43 percent, and oil’s plunge last month could make comparisons on that side of the business difficult as well.

This company looks headed for another dividend cut, which would almost surely send it well under USD10. Sell.

Bay Street Beat—Here’s how analysts on Canada’s equivalent of Wall Street respondend to the second, bigger wave of Canadian Edge Portfolio Holdings’ earnings announcements.

Tips on DRIPs—Reinvest your dividends paid by New York Stock Exchange-listed Canadian companies–in some cases at a discount and without paying commissions.

How They Rate

CE Safety Ratings are based on six operating and financial criteria. Companies meeting all six criteria are rated my highest rating of “6.” “0” is the lowest rating, indicating companies that meet no safety criteria. Safety criteria are described in the text below the How They Rate table and are as follows:

  • One point if Payout ratio meets “very safe” criteria for the sector.
  • One point if Payout ratio has longer-term visibility.
  • One point if Debt-to-Assets ratio meets “very safe” criteria for the sector.
  • One point if the company’s debt maturing before Jan. 1, 2013, is less than 10 percent of its market capitalization.
  • One point if the company’s primary business is recession-resistant. Qualifying varies from company to company, though virtually all Electric Power and Energy Infrastructure companies qualify, while no Energy Services companies do.
  • One point if the company has not cut its distribution over the preceding five years.

I list trusts and high-yielding corporations by the following sectors:

  • Oil and Gas–All energy producers are included here.
  • Electric Power–Power generators.
  • Gas/Propane–Distributors from propane to packaged ice.
  • Business Trusts–A range of businesses involved principally with consumers.
  • REITs–All qualified real estate investment trusts.
  • Trust Mutual Funds–Closed-end funds holding portfolios of individual trusts.
  • Natural Resources–Trusts and corporations that produce resources and raw materials other than oil and gas.
  • Energy Services–Trusts and corporations whose main business is providing drilling, environmental or other services to energy producers.
  • Energy Infrastructure–Trusts and corporations that own primarily pipelines, processing facilities and other fee-generating assets.
  • Information Technology–Trusts and corporations that provide communications, newspaper, directory and other information services.
  • Financial Services–Canada’s banks, investment houses and other trusts and corporations feeding that business.
  • Food and Hospitality–Trusts and corporations that franchise restaurants, own and operate hotels and manufacture and distribute food and beverages.
  • Health Care–Trusts and corporations involved in the medical care and/or supply business.
  • Transports–These trusts and corporations ship freight and move passengers by bus, truck, rail or air.

Coverage Changes

NAL Energy Corp has now merged with Pengrowth Energy Corp (TSX: PGF, NYSE: PGH) and is now de-listed from the Toronto Stock Exchange (TSX) and the US over-the-counter (OTC) market. The deal was completed on Jun. 6, 2012, and all shareholders should by now have received 0.86 shares of Pengrowth. I’ll remove NAL from How They Rate starting with next month’s issue.

FutureMed Healthcare Products Corp and Provident Energy Ltd are no longer covered and have de-listed from the TSX and the US OTC market, as they’ve been acquired by Cardinal Health Inc’s (NYSE: CAH) Canada unit and Pembina Pipeline Corp (TSX: PPL, NYSE: PBA), respectively.

Advice Changes

Here are advice changes for this month. See How They Rate for changes to buy targets and other data. Note that advice and data in How They Rate and the Oil & Gas Reserve Life table now reflect all first-quarter numbers.

Bird Construction Inc (TSX: BDT, OTC: BIRDF)–To Buy @ 14.50 from Hold. I adjust buy targets upward when companies raise distributions and grow their business. Bird has done both and earns a boost.

CurrencyShares Canadian Dollar Trust (NYSE: FXC)–To Buy @ 97 from Hold. The Canadian dollar has slipped back below parity with the US dollar, even as Canada remains far healthier than the US.

Extendicare REIT (TSX: EXE-U, OTC: EXETF)–To Buy @ 9 from Hold. The company has converted to a corporation without cutting its dividend. And solid first-quarter results demonstrate it’s also successfully adjusted to reduced Medicare reimbursement.

The 10 percent-plus yield is more than enough compensation for future dividend risk from more US budget cuts.

NAL Energy Corp (TSX: de-listed, OTC: de-listed)–Merged. The company is now a part of Pengrowth Energy Corp (TSX: PGF, NYSE: PGH).

Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–To Buy @ 20 from Hold. First-quarter results again proved this company is a breed apart, thanks to extremely low cost output of energy that commands a premium price.

TransAlta Corp (TSX: TA, NYSE: TAC)–To Hold from Buy @ 22. The dividend looks solid for now. But there are a number of question marks that make other power producers much better bets.

Ratings Changes

Here are changes in Canadian Edge Safety Ratings, reflecting all first-quarter 2012 earnings results, debt maturities for 2012 and 2013, and recent weakness in energy prices.

Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–To 4 from 5. The first-quarter payout ratio rose to 98 percent despite higher revenue. Management, however, is sticking to guidance that the distribution will be well-covered the rest of the year.

Algonquin Power & Utilities Corp (TSX: AQN, OTC: AQUNF)–To 4 from 5. The payout ratio has again surged over 100 percent, as mild weather depressed demand at regulated utility operations.

Baytex Energy Corp (TSX: BTE, NYSE: BTE)–To 3 from 4. The recent drop in oil prices clouds visibility of future earnings for every energy producer, including those focused almost exclusively on liquids.

Boardwalk REIT (TSX: BEI-U, OTC: BOWFF)–To 6 from 4. First-quarter results were again outstanding, and the owner of residential properties was highly successful in cutting its debt load, taking the debt-to-book value ratio down to just 47.6 percent. The units are still pricey though.

Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–To 4 from 5. The recent drop in oil prices clouds visibility of future earnings for every energy producer, including those focused almost exclusively on liquids.

Enerplus Corp (TSX: ERF, NYSE: ERF)–To 2 from 3. The recent drop in oil prices may force management’s hand regards a potential dividend cut sooner than expected.

InterRent REIT (TSX: IIP-U, OTC: IIPZF)–To 4 from 3. The owner of apartments again posted a huge improvement in results over last year, with revenue rising 14.7 percent on higher rents and occupancy.

Distributable income rose by 118 percent, taking the payout ratio down to just 75 percent in what’s traditionally a seasonally weak quarter due to heating costs.

Northland Power Inc (TSX: NPI, OTC: NPIFF)–To 5 from 6. The payout ratio has risen again above 100 percent for the moment. There’s still great visibility on future earnings, but for now the company doesn’t earn a perfect 6.

Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–To 3 from 4. The drop in oil prices clouds visibility of future earnings, though there’s margin for error with the completion of the NAL Energy Corp merger to safeguard the dividend so long as oil prices remain above USD70 a barrel.

Telus Corp (TSX: T, NYSE: TU)–To 5 from 4. First-quarter free cash flow rose 82.6 percent, as wireless data revenue surged 36 percent and the company continued to expand into eastern Canada. The payout ratio is now just 54 percent.

TransAlta Corp (TSX: TA, NYSE: TAC)–To 3 from 4. Weaker natural gas prices, a still-unsettled dispute with TransCanada Corp (TSX: TRP, NYSE: TRP) and potential environmental liabilities have limited future earnings visibility, though the dividend is well covered by cash flows in the near term.

WestJet Airlines Ltd (TSX: WJA, OTC: WJAFF)–To 5 from 4. The company’s robust first-quarter results and traffic for April and May are a stark contrast to the stresses plaguing most of the airline industry. They’re also the best possible indication the company’s solid performance will continue.

More Information

How They Rate has automatically updated US dollar unit/share prices, dividend payment rates in US dollars, yields, most recent dividend dates, dividend frequency and debt-to-capital ratios. Note that our quote service sometimes includes special annual distributions along with the regular monthly payments.

How They Rate also includes several free links. Clicking on the Toronto Stock Exchange (TSX) symbol will now take you directly to the Google Finance page for every company in the How They Rate coverage universe.

Clicking on the US symbol of a company takes you to a chronological listing of every Canadian Edge and Maple Leaf Memo article in which that trust has been featured. You can also use that page to access articles on other trusts by typing in the relevant exchange and symbol in the “Search Query” box at the top of the page.

For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on dividend paying equities. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission.

The Toronto Globe & Mail features the “Globe Investor” section with all the latest news. Dominion Bond Rating Service is the pre-eminent credit rater in Canada.

The Bank of Canada has a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.

How They Rate can now be accessed several places on the Home Page. The Income Trust Tax Guide has backup to file distributions as “qualified dividends.”

Roger Conrad
Editor, Canadian Edge

Reinvest your dividends paid by New York Stock Exchange-listed Canadian companies–in some cases at a discount and without paying commissions.

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