When a company cuts its dividend, should you cut and run as well? There are plenty of examples where that’s been the best course of action.

Yellow Media Inc (TSX: YLO, OTC: YLWPF), for example, first reduced its dividend on May 7, 2009. It cut again in December 2010 and in August 2011, finally eliminating the payout altogether in September 2011. By the time the company restructured in mid-December 2012, the stock had lost 99 percent of its value.

On the other hand, there are also times when a dividend cut really does mark the company’s nadir. From that point the underlying business recovers, and the stock–and frequently the dividend–bounces back.

That was the case for the vast majority of former Canadian trusts that reduced their dividends when they converted to corporations. In early 2008, for example, TransForce Inc (TSX: TFI, OTC: TFIFF) reduced its dividend from a monthly rate of CAD0.1325 to a quarterly rate of just CAD0.10, altogether a nearly 75 percent haircut.

Yet since that point the stock has returned nearly 300 percent. Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) has returned more than 100 percent since cutting its dividend 20 percent in early 2011. AltaGas Ltd (TSX: ALA, OTC: ATGFF) has raised its monthly dividend twice since cutting it 39 percent in mid-2010 while converting to a corporation. And the stock has returned 134 percent over that time.

Those cuts were special in that they were part of a one-time event that had nothing to do with company operations. But EnerCare Inc (TSX: ECI, OTC: CSUWF) shares have returned 152 percent following a regulatory setback at its submetering business, which forced it to cut its dividend roughly in half in autumn 2009.

And ARC Resources Ltd (TSX: ARX, OTC: AETUF) is up 125 percent since tumbling energy prices induced management to cut a last time in May 2009.

Selling on those dividend cuts clearly would have been the wrong move, just as selling Yellow Media would have been the right one.

The obvious question is how do you know when a cut really means a company has hit bottom?

Unfortunately, the answer depends as much on assessing the qualitative as the quantitative.

If you’ve been holding a balanced and diversified portfolio, a dividend cut at a single company shouldn’t hurt you over much, even if the action is initially followed by a drop in the stock, as it usually is.

And even when a company is headed for worse, it rarely makes sense to sell immediately following the cut.

But it is important to immediately put the offending company on what amounts to a portfolio “watch list.” The question you have to ask is whether or not the company is still capable of building wealth for shareholders. Is the business still on track for growth despite this setback? If the answer is “yes,” you hold on. If there’s any doubt, take the loss and move on.

The Cutters

Just Energy Group Inc’s (TSX: JE, NYSE: JE) dividend cut this week (see Best Buys) is an example of a company I believe to still be on course, despite near-term headwinds.

So are two other Canadian Edge Portfolio Holdings to cut dividends in the last 12 months, Colabor Group Inc (TSX: GCL, OTC: COLFF) and IBI Group Inc (TSX: IBG, OTC: IBIBF).

For many investors the first reaction to a dividend cut is to sell. That’s what we saw in Just Energy’s price the morning of Friday, Feb. 8, the day after the company’s announcement.

Initial damage may be muted if the possibility of a cut is at least partly reflected in the share price of the cutter. And there will be some offset from investors covering their shorts. Both are the case for Just Energy, which yielded fairly close to 13 percent the day before cutting.

On the other hand, this is an environment where the fear of a repeat of 2008 is omnipresent. And when a company cuts its dividend, the obvious assumption is it’s headed for the scrap heap. That’s why the real damage to a stock’s price from a dividend cut is only apparent a few trading days later.

I make the case for holding onto Just Energy in this month’s Best Buys feature. My argument rests on the fact that the business continues to grow in line with management’s long-term targets.

The dividend is still substantial (the yield is roughly 10 percent at the current price) and now will be well covered with available cash in fiscal 2014. And the saved cash will enable the company cut into leverage, which has been a point of contention with Canadian analysts.

The same is true for IBI Group, the development design company that reduced its dividend back in December and went to a quarterly payout. IBI will make its first payout at the new rate of CAD0.1375–about half the old dividend–on March 31.

Also like Just Energy, IBI announced business expansion at the same time as it cut its dividend. That was the purchase of M-E Companies, a professional management and engineering firm based in Ohio with a specialty of transportation, land development and water and wastewater activity.

The addition continues the company’s torrid expansion outside Canada. The challenge has been to achieve efficiencies targeted by management in previous quarters. But with a stronger cash position, IBI’s current dividend rate has a solid cushion. Insiders effectively own 42 percent of the company and have boosted holdings by 14 percent the past six months.

When a company reduces its dividend it takes a while to prove its worth to investors once again, and IBI’s share price has been generally flat since the cut. Although I’m deep underwater on this one, I’m still optimistic about the company’s future.

IBI Group is again a buy up to USD8 for those who don’t already own it.

Colabor Group is also about even with its price following its dividend reduction in March 2012–but with some considerable ups and downs along the way. The company reported generally solid first-, second- and third-quarter earnings and actually started to pick up steam in early January.

Then came the announcement that the Canada Revenue Agency (CRA) is challenging the company’s tax treatment of its conversion to a corporation in August 2009. The result was a quick drop in the stock that’s left it with a yield north of 9 percent once again.

As with all tax and regulatory issues, there’s a certain amount of uncertainty here. Colabor is the first Canadian Edge Portfolio Holding to be targeted by the CRA for some claw-back on taxes. But it’s hardly the only one in the How They Rate coverage universe. Superior Plus Corp (TSX: SPB, OTC: SUUIF), for example, has been fighting with CRA since September over the same issue.

The most likely outcome in this case as well as the one involving Colabor is for some kind of settlement. But however it’s resolved, the key issue for Colabor is to deliver on its plans to boost efficiency and utilize its scale advantages to raise margins in what’s still a difficult operating environment.

We’ll know more about how that’s going when the company releases earnings on or about March 22. Until we get those numbers and there’s more clarity on the CRA tax case, Colabor rates a hold.

Current analyst opinion on Colabor is one “buy,” four “holds” and no “sells.” For IBI, it’s one “buy” and nine “holds.” Just Energy’s before the dividend cut announcement was one “buy,” two “holds” and three “sells,” though that’s likely to change. All three had net insider buying the past six months.

Rounding Up Results

Are any other CE Portfolio recommendations likely to cut dividends in coming months? It’s important to note that Canada is generally a much more conservative country than the US from a business perspective.

Most companies’ managements aren’t going to wait for the roof to fall in before cutting dividends. Rather, the prevailing view is you cut the dividend before sacrificing the long-term business plan or overleveraging.

On the plus side, that means dividend cuts–although definitely not desirable–aren’t necessarily or even usually the harbinger of doom. Companies such as Colabor, IBI and Just Energy have what it takes to recover recently lost ground and a lot more, just as the post-conversion cutters and Enercare did.

On the negative side, this means dividend cuts are possible, even at companies that have conservative business models. In fact the more conservative the financial policies, the more likely management is to pull that lever in times of trouble.

Companies’ yields are essentially how the market handicaps the odds of a cut. Basically, the lower the yield the less the consensus views the possibility of a dividend cut.

When the market is wrong–and history shows it is more often than not–we can look forward to a capital gain in the stock, as the price moves upward and the yield adjusts downward.

When the fears are justified, we will generally see a pullback.

The bottom line is earnings. If these are on target with management’s projections and the business is growing, we have nothing to worry about.

If they come up short, as our Portfolio dividend cutters did, then a cut is possible.

Thus far only a handful of CE Portfolio Holdings have reported fourth-quarter and full-year 2012 earnings. ARC Resources’ strong numbers are highlighted in this month’s In Focus feature. Just Energy’s less stellar results are analyzed in Best Buys.

Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF) was again affected by unfavorable hydrology conditions during the fourth quarter. Nonetheless, funds from operations (FFO) per unit rose 40 percent from year-earlier levels, when the power plant portfolio was smaller and water flows were also light.

Full-year FFO was 20 percent below 2011 levels and some 35 percent below the “long-term average,” a number based on historical water flows to company facilities. For comparison purposes, long-term generation at the plants was 18,202 gigawatt hours (GWh) versus 15,942 GWh actually produced in 2012.

The key driver of Brookfield Renewable’s shareholder value in the long run, however, is effective asset additions. And here the company continues to excel.

During the fourth quarter management inked a deal to acquire a 351-megawatt portfolio of 19 hydroelectric power plants in the northeastern US, with an expected close by March 31. The company also completed the purchase of 378 megawatts of hydro power in Tennessee and North Carolina, finished construction of 19 megawatts in Brazil and kept the 45-megawatt Kokish River plant in British Columbia on track for mid-2014 startup.

Management’s long run targets are 3 percent to 5 percent dividend growth, with a payout ratio of 60 percent to 70 percent of FFO. These results keep the company on target to meet that goal, despite the volatility of water flows.

And the further the company’s reach extends the more resistant it will be to troubles of a single watershed or even multiple regions. That last fact is particularly critical, given increased weather volatility of recent years.

Brookfield Renewable’s most aggressive endeavor now is the attempted takeover of Western Wind Energy Corp (TSX: WND, OTC: WNDEF). This has become a hostile battle, but management is patient and deep-pocketed. And Brookfield Renewable already owns 17 percent of the target.

Even if the takeover attempt fails, the company has plenty of other roads to profit, including what CFO Sachin Shah termed during the conference call as “an incremental CAD6 to CAD8 of value per share that we can surface through re-contracting expiring PPAs.”

PPAs are power purchase agreements with state-owned and regulated utilities. The ability to raise rates is a solid testament to the longevity and value of Brookfield Renewable’s power plant fleet. And it makes the stock basically an invest-to-grow story with low risk for anyone who buys below my target. of USD32. The company’s New York Stock Exchange (NYSE) listing appears to be imminent.

Brookfield Renewable Energy Partners is a buy under USD32.

Cineplex Inc (TSX: CGX, OTC: CPXGF) posted record results, riding a 9.4 percent jump in annual revenues and a 7.8 percent surge in theatre attendance. Adjusted free cash flow per share moved up by 5.7 percent, and earnings per share were up 131.8 percent.

Fourth-quarter tallies were even more impressive, with revenue soaring 23.6 percent on a 23.3 percent surge in attendance. Free cash flow rocketed up 51.3 percent, and earnings per share came in at CAD0.52, an increase of 173.7 percent from year-earlier levels.

The company benefitted from an improved movie draw, the development of various efforts to leverage its product line and the completion of several major theater enhancement projects and openings.

These results demonstrate clearly its lead over the competition and ability to win new markets.

And the acceleration of the fourth quarter over the rest of the year is a very good sign there’s more to come.

Premium entertainment choices such as 3D, UltraAVX, VIP and IMAX are now 30.9 percent of the business.

That’s a boost of 1.5 percentage points over the prior year, and it further insulates company earnings from what’s always the greatest risk of any theatre owner, a series of duds from Hollywood.

The company continues to build market share in urban Canada, as well as to roll out into new areas. Its SCENE loyalty program added its largest number of customers ever in 2012, pushing membership to 4.3 million. And it continued to expand its presence on the web, with Cineplex.com generating 56 percent more page views. That could rise even faster in 2013, with the company launching its UltraViolet service over wireless devices.

One other potential development that might lift 2013 earnings is consolidation. Cineplex’ approach is conservative, and it will likely focus on Canada. But the bias is still toward doing its own development, something that has become much easier as the company has grown.

The only problem with Cineplex now is price. I expect a sizeable dividend increase to be announced in May, which is when management typically makes these decisions. At that point I’ll likely raise my buy target.

Until then, however, new investors should wait on dips to below USD30 to buy Cineplex.

Shaw Communications Inc’s (TSX: SJR/B, NYSE: SJR) fiscal 2013 first-quarter earnings were discussed in a Jan. 10 Flash Alert. Highlights included better than 2-to-1 dividend coverage with earnings, which enabled management to lift the payout 5.2 percent.

Cable and satellite revenue showed solid growth and the company’s margins were solid, demonstrating that it’s fending off competition from the likes of Telus Corp (TSX: T, NYSE: TU).

Since the earnings announcement the Shaw family has demonstrated continuing confidence in the company by purchasing an additional 750,000 Class B shares. The Shaws now own 53,665,223 class A and B shares, and they continue to add to their stake. The company also boosted its balance sheet and better focused its business by selling unused spectrum to Rogers Communications Inc (TSX: RCI/B, NYSE: RCI).

The stock has been a solid performer since we added it to the Conservative Holdings a little over a year ago, producing a 25 percent total return. That’s a little more than I expect to see on an annualized basis.

But with few risks and a long successful operating history, Shaw Communications is definitely a buy any time the stock dips to USD22 or lower.

More Numbers

Here’s when to expect numbers for the rest of the recommendations. I’ve indicated companies that have announced actual release dates as “confirmed” and the rest as “estimate.” We’ve also linked to analysis of results for those companies that have already reported.

The primary reason for the longer reporting period is most of these companies are announcing full-year 2012 results as well as fourth-quarter numbers. Oil and gas producers are also required to file estimates of their reserves along with financials.

Despite the delay, these reports and their accompanying conference calls are still the most important source for seeing how well these underlying businesses are holding up in a challenging environment–and I’ll be paying close attention.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–March 8 (estimate)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Feb. 28 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Feb. 28 (confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–March 7 (estimate)
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–March 12 (estimate)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–February Portfolio Update
• Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–Feb. 26 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–February Portfolio Update
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Feb. 26 (confirmed)
• Dundee REIT (TSX: D-U, OTC: DRETF)–Feb. 20 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Feb. 22 (estimate)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–March 14 (confirmed)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Feb. 14 (confirmed)
• Northern Property REIT (TSX: NPR, OTC: NPRUF)–March 13 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–Feb. 15 (estimate)
• RioCan REIT (TSX: REI, OTC: RIOCF)–Feb. 14 (confirmed)
• Shaw Communications Inc (TSX: SJR/A. NYSE: SJR)–February Portfolio Update
• Student Transportation Inc (TSX: STB, NSDQ: STB)–Feb. 12 (confirmed)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–March 1 (confirmed)

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN OTC: ACAZF)–Feb. 12 (confirmed)
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–March 14 (estimate)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–February In Focus
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Feb. 21 (confirmed)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–March 22 (estimate)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–March 15 (estimate)
• Extendicare Inc (TSX: EXE, OTC: EXETF)–Feb. 27 (confirmed)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–March 26 (estimate)
• Just Energy Group Inc (TSX: JE, NYSE: JE)–February Best Buy
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Feb. 13 (confirmed)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Feb. 12 (confirmed)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–March 7 (estimate)
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–March 7 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–March 7 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–March 4 (confirmed)
• Wajax Corp (TSX: WJX, OTC: WJXFF)–March 6 (estimate)