Most Canadian Edge recommendations picked up in the first quarter of 2011 where they left off from a profitable 2010. It’s still too early to forecast a hat trick–i.e. a third straight year of robust gains on top of last’s year 40 percent and 2009’s 60 percent-plus average total return. But portents for solid gains are good, so long as we stay vigilant.

Below I review earnings from the last three Portfolio companies to report fourth-quarter and full-year numbers. And at the bottom of the document is a list of when to expect the next round of numbers for our picks, which will begin to flow in less than a month.

The good news for now, however, is that Portfolio companies appear well positioned with strong balance sheets, well-protected dividends and clear paths to future growth. There are plenty of potential catalysts for volatility along the way. And we have to remain vigilant for the possibility that even the strongest could falter. But that’s the best possible combination for solid returns to continue as we move to the second quarter of 2011 and beyond.

Yellow Media (TSX: YLO, OTC: YLWPF) reported its fourth-quarter and full-year 2010 numbers more than six weeks ago. Nonetheless, the company continues to attract the most questions from readers.

That’s not too surprising, given that our promotions to new subscribers have featured the company frequently. Yellow also yields nearly 12 percent and has been a Portfolio member since the beginnings of Canadian Edge. And the stock has been subject to considerable volatility of late as well.

Yellow’s been a relative loser over the time I’ve held it in the Portfolio. The positive total return shown in the Aggressive Holdings table is entirely the result of the huge distributions paid over that time, as the stock–after rising from mid-2004 through mid-2006–has basically been in a downturn ever since.

I’ve stuck with the company for one reason: Management’s plan to convert the business from a print advertising model to a web-based advertising model is still on track, just as it’s been since a private capital consortium led by Bain Capital launched Yellow as an income trust in 2003.

As I pointed out in the Feb. 23 Flash Alert and again in the March issue, fourth-quarter cash earnings covered the dividend comfortably and the company continued to make progress toward meeting its Internet goals. In fact, the 29 percent of revenue drawn from web-based sources exceeds the 20 percent target set by management a couple years earlier.

This week, Yellow made another major move, selling the bulk of its Trader Corp unit to Apax Partners for CAD745 million. The deal includes mainly the automotive assets of Trader; Yellow will keep the real estate and employment advertising business, at least for now. The sale is expected to close June 2011, with “significant” proceeds going to paying down debt, according to management.

Trader has been a volatile business for Yellow, notably during the 2008-09 crash when advertising revenue dried up and it began to bleed cash flow. Since then, the division has steadily recovered, thanks to better business conditions but also to innovation spurred by Yellow, such as the successful Dealer.com website franchise.

Being shed of Trader’s operations will make earnings a lot less volatile. But it will also increase the company’s dependence on its directory business, as well as its transition from print to web. That transition had already been largely achieved for Trader, which now generates more than 70 percent of sales from the web, up from 15 percent when Yellow took it over in 2006. There’s a lot further to go with the directory business, which is expected to generate 25 percent of revenue from the web in 2011. But recent acquisitions, organic expansion and debt reduction will keep things moving in that direction quickly.

The immediate market reaction to the transaction was positive, largely because the move shores up the dividend for 2011. After this year dividend safety will depend on the continued growth of the web business. The sold assets generated about 15 percent of revenue but only 8.4 percent of cash flow, so margins should improve with the sale. S&P has also reaffirmed the credit rating with a stable outlook, reducing risk on that score as well.

The upshot is I’m sticking with Yellow Media, and I’m holding my buy target of up to USD8. That being said, I don’t advise anyone back up the truck on Yellow or any other stock in the CE Portfolio, no matter how attractive it may look. That’s the surest road to emotional investing, which is also one of the surest ways to lose money, and lots of it.

Yellow’s a solid buy for investors who can handle the risk–that’s why it’s in my Aggressive Holdings. But it’s not a buy now for anyone who already owns it. I don’t recommend doubling up or any other leveraged strategy.

As for the rest of the Portfolio, my advice is to stick to those trading below my buy targets, as shown in How They Rate and the Portfolio tables. Several stocks now trade above those levels, including March High Yield of the Month Acadian Timber Corp (TSX: ADN, OTC: ACAZF), which is now up more than 10 percent from my initial recommendation.

Unfortunately that’s the way these stocks move some times, and Acadian is almost certainly benefitting from the reality that Japan’s natural disasters will tighten up global forestry markets. Conversely, however, you never make money in markets by chasing anything. If you want to own Acadian and weren’t able to get in, be patient. It will either grow into its new price or slip back to a better entry point. Acadian Timber Corp is still a buy up to USD11.

Meanwhile, stick to the score or so Portfolio companies that are bargains. I’ll have more of these with the April issue of Canadian Edge, which will be published a week from this coming Friday.

Last Numbers

As for the last reporters in the Portfolio of fourth-quarter and full-year 2010 results, Atlantic Power Corp’s (TSX: ATP, NYSE: AT) numbers were solid, as expected.

Atlantic is solely concerned with maximizing cash flow, which requires minimizing taxable earnings. That means the key metric for dividend safety and profitability is always cash available for distribution, calculated by management as cash flow less debt interest, maintenance capital expenditures (anything except acquisitions) and taxes owed.

Cash available for distribution was roughly flat for 2010 from 2009 levels. As a result, the per-share figure declined due to last year’s successful equity issue, bringing in the payout ratio at 100 percent. Importantly, however, that was right in line with management’s long-term guidance about profitability, and the dividend, which it projects, even in a worst-case, is sustainable until at least 2016.

Adjusted cash flow–which factors out one-time items–rose 6 percent for the full year, beating management’s prior guidance. That was in part due to cost savings from lower gas prices, offset by the cost of a maintenance outage at the Auburndale plant. Including earnings from plants accounted as “equity interests” rather than operations cash flow was up 5.8 percent.

Looking ahead to 2011, the startup of the Idaho Wind project (27.6 percent owned) and the purchase of Cadillac Renewable Energy (a 39.6 megawatt biomass facility) have already started to add to cash flow. Meanwhile, the Piedmont Green Power project–a 53.5 megawatt biomass plant–is fully financed and on track for startup next year. These projects are essential for future cash flows, even as management pares back less profitable assets like the Topsham and Badger Creek plants in California (formerly 3 percent of cash flow).

Management expects to receive distributions from projects of $80 million to $90 million in 2011, versus $83 million in 2010. Overall cash flow, meanwhile, is expected to be higher thanks to Idaho Wind and Cadillac. Payout ratio guidance is 100 to 105 percent, which probably rules out a dividend increase this year. But guidance is still for sharply lower percentages in 2012, not counting what new projects management may launch.

Atlantic’s position on dividend growth still seems to be that until new long-term contracts are sorted for the Pasco plant and new facilities come on stream, the best policy is to hold the current level. Consequently, my position is that USD15 is the right level for my buy target, which is supported by the 7 percent-plus monthly yield, paid in Canadian dollars. That’s a level the stock seems able to easily hold, occasionally dipping below to provide an entry point for those who don’t already own the stock.

At its core, Atlantic is a bet on management’s well-demonstrated ability to manage a vast array of contingencies to garner cash flow, which it then passes to investors as dividends. Atlantic Power Corp is a buy up to USD15 for those who don’t already own it.

IBI Group (TSX: IBG, OTC: IBIBF) shares have surged since the company announced fourth-quarter earnings on Mar. 21. Revenue for the year came in at CAD290.4 million, up from CAD273.7 million the year earlier. It was up 11.1 percent in the fourth quarter from year-earlier levels. Cash flow was up 40.2 percent from year-earlier levels, as cash flow margins rose to 16.1 percent of revenue from 12.7 percent a year ago. That was also well above the 14.8 percent margin recorded in the third quarter.

Distributable cash flow (DCF) was slightly lower for the year but up 58.9 percent in the fourth quarter. DCF remains the key metric used by IBI to set dividends, even after the company’s Jan. 1 conversion from income trust to corporation. That’s solid coverage for the new dividend rate and a good sign for safety and growth in 2011 and beyond.

As has been the case in the past several quarters, IBI’s business strength was underpinned by its ability to garner government work for its infrastructure design business (67 percent of revenue), as well as successful acquisitions in the US and elsewhere. These jobs historically haven’t been as profitable as those in the private sector. But backlog has remained very healthy, with 2011 levels still robust and diverse, covering a range of large projects.

One area of the private sector that is showing signs of life is the oil sands, and IBI is pushing there, completing the merger with CSM Engineering at the end of the fourth quarter. CSM is a leading civil engineer in the oil sands region of Fort McMurray, Alberta, which is increasingly showing signs of a revival after a couple years of reduced activity. This division will begin adding backlog and business this year.

In addition, the acquisition of Nightingale has expanded the business in Africa, Australia, Europe and the Persian Gulf. And the purchase of MAAK Technologies has extended its expertise in giant water projects, which are also ramping up globally.

The weak point for the company continues to be its US operations, due to a market that remains generally soft. On the other hand, those conditions have also been conducive to takeovers to enhance future profitability as the US economy works its way to health. The strong Canadian dollars has also increased the appeal of expanding south of the border by boosting purchasing power of companies like IBI.

Dividend coverage for the fourth quarter–normally a period of weakness (only 12.7 percent of annual revenue historically)–was 1-to-1. That’s a marked improvement from 2009’s 0.64-to-1, and it means few worries for investors on that score.

At the company’s fourth-quarter conference call last week, CFO Allan Kamerman projected 15 percent revenue growth for 2011, with 2.5 to 5 percent (a third) coming from organic sources and the rest from acquisitions. That’s in line with what the company has done in the past, boosting its expertise and taking advantage of what’s historically been a fragmented market for its services. And it’s based on what management calls a “reliable trend” for growth, with IBI winning a wide range of bids for new business. Buy IBI Group up to USD15 if you don’t own it.

Innergex Renewable Energy (TSX: INE, OTC: INGXF) is up slightly since announcing its fourth-quarter and full-year 2010 results late last week. As expected, results were up strongly on a dollars and cents basis, reflecting the successful merger of the former Innergex Income Fund with its parent Innergex Renewable Energy.

Adjusted cash flow from operating activities–the key profit metric for judging dividend safety–was up 82.5 percent. The 81.2 percent boost in power generated exceeded long-term averages by 6 percent for the combined portfolio, reflecting better operating conditions and efficiency. Gross operating revenue, meanwhile, was a rough double from last year’s levels. Dividend coverage for the quarter, meanwhile, was a solid 1.35-to-1, after taking out dividends paid to preferred shareholders.

The key to Innergex’ long-term health and growth potential is successfully completing development of a portfolio of wind and water power projects, output from which will be sold to provincial power authorities under long-term contracts that largely strip out operator risk. On this score management reported solid progress at its Montagne-Seche and Gros-Morne wins farms, with completion dates on trade for Dec. 1, 2011. Gros-Morne Phase II is expected to be wound up Dec. 1, 2012.

The company has a huge potential backlog of such projects. Each one will boost cash flow as it’s completed. Innergex is also set to complete the takeover of Cloudworks Energy Inc in early April, adding another source of income from plants already operating and under contract. And it has submitted two applications for solar power plants totaling 20 to 39 megawatts, cash flow from which would also be locked in by long-term contract with provincial power authorities.

Completing these deals means continued prudent access to capital by Innergex remains essential. Fortunately, the more cash-generating projects it adds, the greater its financial power and ability access capital. And the company’s portfolio is also broadly diversified, ensuring against volatility in wind and water conditions in a single area of the country.

Unlike in the US, low natural gas prices haven’t impeded the growth of renewable energy sources, which is mandated by laws passed by the Conservative Party government. That mandate won’t change if the Conservatives are indeed unseated and a ramshackle coalition government is forged between Liberals, New Democrats and Bloc Quebecois. In fact, renewable energy is one of the few things the opposition parties do agree on, other than their hatred of the Conservatives and determination to deny them a majority.

In any case, Innergex looks well on track for the kind of steady growth and safe, high dividends I initially added it to the Conservative Holdings for. Management expects the payout ratio to come in close to 100 percent this year and 80 to 90 percent the next, with a descent to 60 percent by 2015–given the projects in the pipeline. That, in CEO Michel Letellier’s words during the fourth-quarter conference call, will bring “a steady increase on the dividend,” though management will absolutely not lever up to accomplish that.

Slow dividend growth is one reason I’m keeping the buy target for Innergex Renewable Energy at USD10. But it’s a solid bet for conservative investors up to that level, which it’s slightly below as of this writing.

Here are first-quarter 2011 reporting dates for the CE Portfolio.

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–Apr. 28 (estimate)
• Ag Growth International (TSX: AFN, OTC: AGGZF)–May 13 (estimate)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–May 5 (estimate)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 10 (estimate)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–May 18 (estimate)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Apr. 29 (estimate)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–May 13 (confirmed)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–May 10 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–May 16 (estimate)
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–May 5 (estimate)
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–May 10 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–May 12 (estimate)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–May 6 (estimate)
• Provident Energy Ltd (TSX: PVE, NYSE: PVX)–May 13 (estimate)
• Vermillion Energy Inc (TSX: VET, OTC: VEMTF)–May 6 (estimate)
• Yellow Media Inc (TSX: YLO, OTC: YLWPF)–May 5 (tentative)

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Apr. 29 (estimate)
• Artis REIT (TSX: AX-U, OTC: ARESF)–May 12 (estimate)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–May 13 (estimate)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–May 10 (estimate)
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–May 13 (estimate)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–May 11 (estimate)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–May 13 (estimate)
• CML Healthcare Inc (TSX: CLC, OTC: CMHIF)–May 5 (estimate)
• Colabor Group (TSX: GCL, OTC: COLFF)–Apr. 28 (estimate)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–May. 4 (estimate)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–May 6 (estimate)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–May 6 (estimate)
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–May 10 (estimate)
• Just Energy Group Inc (TSX: JE, OTC: JSTEF)–May 20 (estimate)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–May 10 (confirmed)
• Macquarie Power & Infrastructure Corp (TSX: MPT, OTC: MCQPF)–May 11 (estimate)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–May 11 (estimate)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–May 6 (estimate)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Apr. 29 (estimate)
• TransForce (TSX: TFI, OTC: TFIFF)–May 17 (confirmed)