New Flyer Industries Inc(TSX: NFI, OTC: NFYEF) has cut its dividend to a new monthly rate of CAD0.04875 per share, effective with the Sept. 17 payment.

The bus manufacturer’s 32 percent reduction is considerably better than the 50 percent management had telegraphed earlier. And it accompanies the now-completed redemption of the 14 percent notes attached to the company’s former income deposit security.

The question is how safe the current yield–now paid out entirely as an equity dividend–will be going forward. As I reported last month, conditions in the bus sales sector remain abysmal, the industry’s primary customers still grappling with cash flow issues.

This certainly showed up in New Flyer’s second-quarter cash flow, which slid 18.3 percent on a combination of lower revenue and crimped selling margins. The company did have some success cutting costs and booked an order for 95 heavy-duty, hybrid diesel-electric powered buses from Washington Metro Area Transit last month.

Nonetheless, the second quarter payout ratio was still 163 percent, even after taking the distribution cut into account. That follows a 90 percent payout ratio the previous quarter.

Average selling prices fell 0.9 percent during the quarter from year-earlier tallies, offsetting a 2.3 percent increase in units sold. That’s a direct flip with the previous quarter, when selling prices were higher and unit sales lower.

Encouragingly, management does expect both volumes and selling prices to be higher in the second half of the year.

Liquidity is also much improved, with the 14 percent bonds redeemed and the reduced dividend providing an estimated CAD12.2 million in annual savings. The soonest debt maturity is Apr. 24, 2014, when a CAD212 million credit line that’s currently CAD101 million drawn must be rolled over. The company should have plenty of time to bring that down to a palatable level, at least so long as sales don’t deteriorate rapidly.

This is still, however, a challenged industry. And if the US does adopt austerity measures after the November elections, as Republicans seem to advocate, things could get a lot worse in a big hurry. There are many safer ways to get a 7 percent-plus yield, including both stocks in the September Best Buys. I’m encouraged by the less-than-expected dividend cut. But my advice is still to sell New Flyer Industries.

Current Watch List

The fact that there was only dividend cut this month in the How They Rate universe is mostly a testament to Canadian companies’ conservative financial and operating policies. Of the companies we track in How They Rate, 104 have absolutely no debt maturing between now and the end of 2013. In fact, the only companies with significant amounts of debt to refinance are the country’s major banks, for which it comes with the territory.

That’s an extraordinary degree of conservatism across the board. And it means, with very few exceptions, that corporate Canada could pretty much wait out a sudden tightening of credit markets. Payout ratios are also generally under control, even in the oil and gas industry, where low selling prices and tough drilling conditions sent them higher during the second quarter.

Below is the current Watch List.  The analysis reflects all second-quarter 2012 earnings releases and guidance calls as well as debt maturing through the end of 2013.

Note that I’ve removed Aston Hill Income Fund (TSX: VIP-U, OTC: BVPIF) from the List. The closed-end fund’s distributions were wholly covered by investment income in the first half of 2012.

That doesn’t mean management won’t have to adjust the distribution eventually to address some contingency. But for now, the payout looks solid. Hold.

I’m also removing TransAlta Corp (TSX: TA, NYSE: TAC) from the List. The power generation company should see some improvement in cash flows in the second half of 2012 from its North American operations.

And the purchase of a power plant in Australia is expected to be accretive to earnings immediately after closing later this month. Now near a multiyear low, the stock’s a hold.

New to the List is Freehold Royalties Ltd (TSX: FRU, OTC: FRHLF). Management warned with the release of second quarter earnings that it may “revisit” the distribution rate next year as the company absorbs new cash taxes.

Clearly there’s no room for error with the payout ratio over 100 percent for the first half of the year. Higher energy prices will trigger an instant recovery for cash flow and remove the danger. But I take all management warnings seriously. Hold.

AvenEx Energy Corp (TSX: AVF, OTC: AVNDF) reported a 25 percent drop in its second-quarter production, and its services and marketing unit contributed more than half of its income. That can only partly be blamed on falling energy prices, and it bodes ill for the future. Sell the small oil and gas producer.

Bonavista Energy Corp (TSX: BNP, OTC: BNPUF), a gas and gas liquids-weighted producer, looks a lot better after reporting higher production in the second quarter and announcing the purchase of an acquisition that will boost output 10 percent immediately.

Management, however, still may have to cut if natural gas liquids prices don’t cooperate. Buy under USD18.

For Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF) the question is whether there’s one more dividend cut in store here before the cycle for the global pulp market turns.

Even a cut may not affect the share price much, but the current payout ratio is 100 percent of second-quarter distributable cash flow. That’s the danger zone for such a cyclical company. Hold.

Chorus Aviation Inc’s (TSX: CHR/B, OTC: CHRVF) second-quarter earnings were solid at least on the surface, with a 48 percent payout ratio based on distributable cash flow. The company also reached a settlement with Air Canada (TSX: AC/A, OTC: AIDIF) on costs.

Unfortunately, Air Canada is now clearly trying to move business away from Chorus, even as the company continues to flounder when it comes to attracting new business. That adds up to dividend risk and a possible plunge to CAD2 or lower. Sell.

Data Group Inc(TSX: DGI, OTC: DGPIF) again earned its distribution by a comfortable margin in the second quarter, turning in a payout ratio of 63 percent based on distributable cash flow. The existing business was steady, with revenue up 3.3 percent and cash flow up 7.4 percent, and the company held market share in legacy products and continued to launch new ones.

The nature of this business means the stock is for speculators only. But it’s hard to argue a 15 percent yield doesn’t price in all reasonable risk. Hold.

Enerplus Corp’s (TSX: ERF, NYSE: ERF) best second-quarter number was a 9 percent boost in production, fueled by a 7 percent jump in oil and liquids output. The worst was a continued rise in the debt-to-cash flow ratio to 2-to-1 and the almost certain prospect that ratio will rise in the second half of 2012.

Management has put on some hedges for natural gas output, which is encouraging. But this stock has snapped back over the past month as though the current dividend is safe. That means the stock is going to plunge if there is a problem. I prefer Pengrowth Energy Corp (TSX: PGF, NYSE: PGH), which is less leveraged, more oil weighted and cheaper as well. Sell.

EnerVest Energy & Oil Sands Total Return Trust’s (TSX: EOS, OTC: EOSOF) entire dividend in the first half of 2012 was return of capital.

The closed-end fund would do better if energy stocks move higher. But dividend investors should switch to one of the Canadian Edge Portfolio’s Mutual Fund Alternatives. Sell.

FP Newspapers Inc’s (TSX: FP, OTC: FPNUF) second-quarter profit fell 25.3 percent, as revenue slid 6.3 percent. For once the problem wasn’t subscriptions, which were flat. Rather, it was a drop in advertising revenue across the board, a particularly ominous sign.

The payout ratio of 89 percent of distributable cash flow seems reasonable. But it’s hard to see how this declining business can keep paying generous dividends indefinitely. Sell.

GMP Capital Inc(TSX: GMP, GMPXF) is still holding market share, but business is very bad.

Unless stock market conditions improve the payout almost has to be cut again, though the share price probably wouldn’t sustain too much damage given the yield is just 4 percent now. Hold.

Labrador Iron Ore Royalty Corp’s(TSX: LIF-U, OTC: LIFZF) royalty income distributions to shareholders remain steady, but the global iron ore prices on which they depend are anything but. Hold.

New Flyer Industries Inc’s(TSX: NFI, OTC: NFYED) place on the Watch List is explained above. Sell.

Precious Metals & Mining Trust(TSX: MMP-U, OTC: PMMTF) once again generated no investment income at this fund for the first half of 2012. The premium to net asset value is a positively fantasyland 26.2 percent at last count, meaning new investors are getting about 74 cents of assets for every dollar they invest.

I’m bullish on resources and mining. But a distribution cut at this one could come at any time, and downside risk is almost surely in the low single digits neighborhood. Sell.

Ten Peaks Coffee Company Inc’s (TSX: TPK, OTC: SWSSF) second-quarter payout ratio widened out to 272 percent, as lower coffee prices hit gross profit to the tune of 29.2 percent. Cash flow per share fell 35.7 percent.

My guess is a dividend cut and down-leg for the stock by early next year. Sell.

The only encouraging thing about second-quarter numbers from Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF), as I wrote here last month, was a 6 percent drop in operating costs per barrel of oil equivalent produced. Otherwise all we saw was falling production levels that if not turned around virtually ensure another dividend cut.

The stock’s likely to hold its current level unless oil prices really crater. But there are far more attractive sector stocks, and remember that the current yield quote as of this writing doesn’t reflect the 40 percent dividend cut announced last month. Hold.