Dividend Watch List

Two Canadian trusts cut distributions last month. Neither move caused much reaction in the market. Both now trade at significantly higher prices.

That’s a major sea-change from the action of last fall and winter, when a record 77 reductions ripped through the Canadian Edge universe, many by repeat offenders. And last month’s cuts were exactly matched by dividend increases, a pair of 25 percent boosts by Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) and CI Financial (TSX: CIX, OTC: CIXUF).

ARC Energy Trust (TSX: AET-U, OTC: AETUF) trimmed its monthly payout by another two cents to CAD0.10 per unit. Management’s primary reason: the drop in natural gas prices coupled with the needs of its capital spending program in the Montney Shale region and its desire to hold down debt.

The new payout is only 38 percent of first quarter distributable cash flow and will allow continued development of Montney, chiefly the construction of a new natural gas plant at Dawson. Debt was held to just 1.57 times annual cash flow. Encouragingly, ARC brought down operating costs per barrel of oil equivalent output to 5 percent below budget, and it cut transportation costs 17 percent below, general and administrative costs 69 percent under and interest costs 46 percent lower. It also held output targets steady in the 62,000 to 64,000 barrels of oil equivalent per day range.

Those are clear signs the trust is weathering the downturn in energy, even as it positions for the next leg up with its Montney finds. Realized selling prices for natural gas in the second quarter are likely to be below first quarter levels but should be balanced out by higher oil prices.

Selling for just 85 percent of the value of its reserves–based on year-end 2008 energy prices (USD44.60 per barrel oil, USD5 per million British thermal units natural gas)–ARC Energy Trust is a buy up to USD18.

Avenir Diversified Income Fund’s (TSX: AVF-U, OTC: AVNDF) 27.7 percent dividend cut was actually somewhat less than the market expected. Unfortunately, it may not be the last, as the small trust posted negative distributable cash flow in the first quarter.

The primary reason was the unexpectedly large expense of unloading a biodiesel marketing operation. There were, however, other troubling signs, such as rising energy production costs that have now hit over CAD17 per barrel of oil equivalent.

On the plus side, management has stated it’s committed to paying a high dividend as long as Avenir remains independent, including after 2011. And it’s also exploring a potential sale of the company to maximize shareholder value. The energy production and marketing business is small but has been profitable, and the trust’s real estate portfolio remains rented and is producing cash. The trust also has no bank lines drawn on oil and gas production operations and CAD86.5 million in available liquidity, ensuring it won’t be going out of business.

On the negative side, however, this is still a high payout ratio for a company moving into what’s historically been its slow season during a recession. That means considerable risk of further distribution cuts. Downside should be protected by the trust’s low price of just 65 percent of book value and 89 percent of net asset value (not including the value of real estate and marketing assets).

But until we see another quarter of earnings numbers and some positive cash flow, Avenir Diversified Income Trust is a hold.

Some 16 trusts in the How They Rate universe have eliminated distributions in recent years. The good news is zeroing out dividends hasn’t necessarily spelled doom for trusts in the past. Several have actually restored payouts after suspending them. Others have managed sharp price recoveries, at least giving income investors an opportunity to sell at a higher price.

Unfortunately, the majority of cutters in recent years are still struggling to get back–and most may never make it. Here’s a roundup of their prospects and progress, or lack thereof.

Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV) saw its first quarter funds from operations per share tumble -4 percent, largely on a steep drop in its realized selling price for natural gas output. Overall output also fell 10 percent, as management sheltered cash to keep Montney Shale development on track.

It’s pretty clear at this point that Advantage’s decision to convert to a corporation and eliminate its distribution was made from a position of extreme weakness, and only a resurgence of natural gas prices can get things back on track. The company sells at a very attractive 35 percent of net asset value as calculated in its annual review of reserves. The catch is the conversion process is bound to confound more than a few brokers. My advice is for US investors to stand aside for now, with an eye to coming back to Advantage Energy Income Fund later as a speculation on gas.

Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF) managed to cut operating costs by 5 percent and enjoyed a respite from soaring fuel costs. Nonetheless, it still saw sales drop 4 percent as customers cut back to deal with the recession and net debt to cash flow rose to 3.1, from 2.6 a year ago. That suggests management is still challenged in its pledge to cut debt, a stated goal when it eliminated Arctic’s dividend in late 2008.

The worst news on Arctic is it still looks as far as ever from settling its US Dept of Justice investigation, of which it’s now a target. And there are a host of related suits that don’t show any sign of going away either. Sell Arctic Glacier Income Fund.

Clearwater Seafoods Income Fund (TSX: CLR-U, OTC: CWFOF) may yet survive after getting a new CAD57 million loan from GE Capital. Meanwhile, cash flow and profit margin showed strong improvement.

Unfortunately, much of the improvement was due to the stronger US dollar, which has sharply reversed in recent weeks. The larger problem is this is just not a good business to flow though large amounts of cash to investors. Clearwater Seafoods Income Fund is still a sell.

Cinram International Income Fund’s (TSX: CRW-U, OTC: CRWFF) credit rating was revised upward to B by Standard & Poor’s last month. That’s a good sign for its survival. But the fact remains that its core DVD and CD distribution business has never been conducive to paying distributions, which have now been wholly suspended since January 2008.

First quarter revenue slid 19 percent, despite strength in the US dollar that should have helped revenue. Don’t hold your breath for dividends here. Sell Cinram International Income Fund.

Contrans Income Fund (TSX: CSS-U, OTC: CSIUF) finally succumbed to recession pressures this year, eliminating its distribution and posting a 27 percent drop in first quarter sales. Distributable cash flow fell in half.

Management is working to snare new business and hold what it has. But this trust isn’t going anywhere until there’s a real recovery in the heartland. Sell Contrans Income Fund.

Enterra Energy Trust (TSX: ENT, NYSE: ENT), a small oil and gas producer, has worked very hard to bring a once untenable debt load under control. Unfortunately, that’s also made it very difficult to produce enough to hold down operating costs, and the company has still drawn 73 percent of its credit lines even as output fell 9 percent in the first quarter of 2009.

Low realized selling prices for oil (USD40.22 per barrel) leave a lot of upside in cash flow and natural gas realized prices (CAD4.78 per million British thermal units) aren’t particularly high either. This one, however, is still living right on the edge with no dividend to reward patient speculators. Sell Enterra Energy Trust.

Huntingdon REIT (TSX: HNT-U, OTC: HURSF) was everything more conservative rivals weren’t during the boom period: highly leveraged and on the lookout to expand rapidly. Now it’s being forced to sell properties in a desperate bid to stay solvent and ride out the downturn.

First quarter distributable income fell 43.1 percent as net operating income slid 14 percent. The bright side is the REIT has apparently now serviced its maturing debt for the rest of the year. The bad news is it still may face falling revenue as occupancy drops and costs rise. There are plenty of other REITs around with upside and infinitely less risk. Sell Huntingdon REIT.

The fact that Menu Foods Income Fund (TSX: MEW-U, OTC: MNUFF) is still in business today is a testament to patient and steady management. A tainted food scandal that was in no way its fault has now been settled. And the company saw its first quarter sales surge 51.3 percent and cash flow by 42.6 percent as it successfully implemented price increases and enjoyed 6.7 percent growth in volume sales of its packets and steel can pet food.

Nonetheless, it now faces the potential departure of customers accounting for more than 9 percent of overall sales. Eventually, this one is going to catch a break, but it may be a while. Hold Menu Foods Income Fund.

Newport Partners Income Fund (TSX: NPF-U, OTC: NWPIF) is basically a portfolio of stakes in companies from a wide range of industries. New management has pledged to improve efficiency throughout its portfolio to better deploy capital and eventually restore the dividend, which was suspended in October of last year.

The bad news is many of the businesses held are proving to be more cyclical than expected. But the overall portfolio had a decent first quarter, so there’s reason for hope. Newport Partners Income Fund is a speculative buy up to USD0.50.

Peak Energy Services Trust (TSX: PES-U, OTC: PKGFF) hasn’t paid a dividend since December 2007, when it discontinued it as part of a merger with another small energy services trust. Since then, it’s been able to survive by continually streamlining its activities.

First quarter numbers were the best in a long while, as sales surged 33 percent and cash flow jumped 31 percent, despite a drop in utilization from year earlier figures. Unfortunately, as management warned with its earnings release, the energy services business has now dropped off far more than it had initially expected.

Peak looks well-positioned to survive. But until the energy business perks up again, there’s not going to be much in the way of a dividend here. Selling at just 22 percent of book value, the price is low enough that Peak Energy Services Trust rates a hold.

Precision Drilling Trust (TSX: PD-U, NYSE: PDS) also pays no dividend, which it discontinued entirely in February after cutting several times in the recent past.

The single most encouraging development this year was the decision of an Alberta government entity to effectively give the company a cash infusion. That suggests Precision is in the game to stay. So does a 31 percent increase in first quarter revenue and a 15 percent jump in cash flow.

The Grey Wolf acquisition is proving to be a big plus for the trust, further extending its reach into the US market and offsetting some of the shrinkage in Canada. That sets up the trust well for a sharp recovery when energy prices eventually bounce back enough to revive drilling activity sufficiently in North America. Unfortunately, that may be a while. Precision is a buy for speculators up to USD5 but only as a speculation for a small part of portfolios. My preferred driller play is still Trinidad Drilling (TSX: TDG, OTC: TDGCF).

PRT Forest Regeneration Income Fund (TSX: PRT-U, OTC: PFSRF) is a major casualty of the collapse of the US housing market and the general weakness of the US dollar versus its Canadian counterpart in recent years.

The former has depressed the timber industry continent wide, while the latter hurts all Canadian companies attempting to compete in the US. The good news is management has apparently positioned the trust to survive. The bad news is that’s about all it’s going to do until the US housing market comes back and revives the North American timber industry. Selling at just 32 percent of book value, PRT Forest Regeneration Income Fund is cheap enough to rate a hold.

SFK Pulp Fund (TSX: SFK-U, OTC: SFKUF) operates in perhaps the only business worse than US housing in recent months, the pulp and paper sector. Not only is the market depressed for SFK’s main products, but the timber industry it relies on for raw materials is in a deep freeze. As a result, the trust is caught in the untenable position of producing goods decidedly not in demand with scarce raw materials.

Worst of all, primary supplier AbitibiBowater (NYSE: ABH) has filed Chapter 11 and terminated its contract with the company’s primary facility, the Saint-Felicien mill, cutting off 80 percent of needed supply of wood waste.

SFK’s first quarter sales were off 40.3 percent as cash flow swung negative. And, unfortunately, the worst is probably yet to come. Sell SFK Pulp Fund.

Sun Gro Horticulture Income Fund (TSX: GRO-U, OTC: SGHRF) has also been a victim of the flailing US housing industry and its devastating impact on the North American forestry sector.

The drive to offset carbon dioxide (CO₂) emissions may not provide much of a leg up either, as CO₂ regulation battles to get through Capitol Hill. On the plus side, however, this company seems to be getting its act together by streamlining and focusing operations.

Distributable cash flow per unit in the first quarter surged 150 percent on a seven-fold jump in operating income and a 7 percent boost in revenue.

And the trust also succeeded in cutting down its debt. That’s all encouraging. In my view, however, it’s been far more than reflected in the share price, which has risen 150 percent since late March. Sell Sun Gro Horticulture Income Fund.

Tree Island Wire Income Fund (TSX: TIL-U, OTC: TWIRF), a provider of industrial wire, is yet another victim of the floundering US housing industry. Unfortunately, it’s had less luck than Sun Gro reordering its debt, as it’s now in violation of covenants as of first quarter numbers.

First quarter sales were slammed 30.7 percent and cash flow crashed 37.1 percent, as the market remained extremely weak for Tree’s products. That leaves little reason to expect the distribution, suspended in January 2009, is coming back any time soon. And the trust’s business is also hurt by a rising Canadian dollar. Sell Tree Island Wire Income Fund.

True Energy Trust (TSX: TUI-I, OTC: TUIJF) is a gas-focused producer. Like Enterra, it struggles from being a very small player in an industry dominated by big boys. Its share price is arguably the cheapest of any producer trust at just 19 percent of net asset value. But funds from operations fell 73.3 percent in the first quarter, and costs soared after recent asset dispositions.

Coupled with the fact that lenders only approved a smaller credit line, the future looks very cloudy to say the least. There are plenty of higher percentage ways to score big gains from a recovery in energy prices. Sell True Energy Trust.

Here’s the rest of the Dividend Watch List. See How They Rate for buy/hold/sell advice.

• Big Rock Brewery Income Trust (TSX: BR-U, OTC: BRBMF)
• Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF)
• Boston Pizza Royalties Income Fund (TSX: BPF-U, OTC: BPZZF)
• Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF)
• Essential Energy Services Trust (TSX: ESN-U, OTC: EEYUF)
• FP Newspapers Income Fund (TSX: FP-U, OTC: FPNUF)
• InnVest REIT (TSX: INN-U, OTC: IVRVF)
• Jazz Air Income Fund (TSX: JAZ-U, OTC: JAARF)
• Labrador Iron Ore Royalty Income Fund (TSX: LIF-U, OTC: LBRYF)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)
• Primaris REIT (TSX: PMZ-U, OTC: PMZFF)
• Royal Host REIT (TSX: RYL-U, OTC: ROYHF)
• Swiss Water Decaf Coffee Fund (TSX: SWS-U, OTC: SWSSF)

Slow DRIP

US securities laws restrict participation in dividend reinvestment plans (DRIP) of foreign-based 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.

Of CE Portfolio recommendations, Paramount Energy Trust (TSX: PMT-U, NYSE: PMT), Penn West Energy Trust (TSX: PWT-U, NYSE: PWT) and Provident Energy Trust (TSX: PVE-U, NYSE: PVX) do allow US investors to participate in their respective DRIP offerings, with certain limitations.

Note that those three trusts, and Harvest Energy Trust (HTE.UN, NYSE: HTE), which also offers US investors a DRIP option, are listed on the New York Stock Exchange and have, therefore, opted into US filing and registration requirements. It’s basically a matter of how much overhead expense trusts are willing to absorb.

Bay Street Beat

BMO Nesbitt Burns analyst Peter Rhamey believes BCE (TSX: BCE, NYSE: BCE) will buy out the minority interest in Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF), the largest business trust with a market cap of CAD3.2 billion, in response to the Canadian government’s Tax Fairness Plan, but it’s not likely to happen before the second half of 2011.

In a research note this week, Mr. Rhamey suggested that a merger of BCE and Bell Aliant makes sense from an operational perspective. “Clearly there would be synergies to be realized, not the least of which would be full wireline, wireless and satellite broadcast service integration.”

The delay until late 2011 will allow BCE CEO George Cope time to tighten up BCE’s operations and boost the share price. Bell Aliant CEO Karen Sheriff will deal with potential conversion issues, labor negotiations and debt refinancing.

Ms. Sheriff, in the top slot for six months, told analysts that the company plans to cut CAD60 million in costs and is focused on converting households to Bell Aliant’s Internet and other broadband services. As for distributions to investors, Mr. Rhamey forecast a CAD2 to CAD2.20 per share post-conversion annual dividend, down from the current CAD2.90. In other words, it will continue to pay most of its cash to investors.

In other happenings on Bay Street, the rechristened IESI-BFC Ltd (TSX: BIN, OTC: ), nee BFC Canada Ltd, joined mainstays Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF) and CE Conservative Holding CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF) to form a select group of S&P/Toronto Stock Exchange Composite Index components posting perfect 5.000 average ratings from analysts.

And its announcement that plans to convert to a corporation and discontinue its dividend has earned Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV) a little more love on Bay Street; the fund is among the highest risers since its announcement and now commands five “buy” ratings, one “hold” and not a single “sell” among the analysts who cover it. Freeing up cash to focus on exploiting its promising Montney shale play is a move that’s clearly drawn some positive notice, but there are more attractive options in the oil and gas space–options that offer monthly distributions as well as capital appreciation.

Slow DRIP

US securities laws restrict participation in dividend reinvestment plans (DRIP) of foreign-based 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.

Of CE Portfolio recommendations, only Penn West Energy Trust (TSX: PWT-U, NYSE: PWT) allows US investors to participate in its DRIP offering, with certain limitations.

Note that Penn West is listed on the New York Stock Exchange (NYSE) and has, therefore, opted into US filing and registration requirements. Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF) and Provident Energy Trust (TSX: PVE-U, NYSE: PVX) do, although listed on the NYSE, do not make their DRIPs available to US investors, though Provident states in the information circular for its plan that it “expects to seek applicable US regulatory approvals in the future.”

It’s basically a matter of how much overhead expense trusts are willing to absorb. Check the website of NYSE-listed non-Portfolio trusts for information on their respective DRIPs. Trust websites are accessible via the How They Rate Table by clicking on the company name.

Alberta and OPEC

Alberta has established an official relationship with the Organization of Petroleum Exporting Countries (OPEC). OPEC’s interest in the Canadian province was surely piqued by a report from IHS/Cambridge Energy Research Associates that estimated the volume of oil reserves in the Great White North at 173 billion barrels. That would make the Canada the second-largest holder of recoverable reserves in the world, behind Saudi Arabia.

Alberta Premier Ed Stelmach was given a seat at opec dialogues when matters of mutual interest will be discussed, as are other jurisdictions such as the US and the EU. OPEC had little interest in the oil sands for most of this decade, but that view has changed. The volume of crude present in Canada is simply too significant to ignore; it will become critical to meeting projected future demand.

OPEC members with funds to invest are now attracted to the stability and long-term nature of the oil sands. And the downturn in oil prices has brought share prices and development costs down, making certain assets particularly attractive.