Dividend Watch List

Two Canadian Edge How They Rate companies announced distribution cuts last month. The Keg Royalties Income Fund (TSX: KEG-U, OTC: KRIUF) confirmed it will remain an income trust for the foreseeable future, but will reduce its monthly payout to CAD0.08 cents per unit from the prior rate of CAD0.1065.

The new rate looks sustainable, particularly in light of what appeared to be improving business fundamentals in the third quarter of 2010. We’ll know more about what to expect from The Keg–a franchiser of restaurants on both sides of the border–when the company releases its fourth-quarter and full-year 2010 earnings on Mar. 4. Until then The Keg Royalties Income Fund continues to rate a solid hold, yielding more than 7 percent paid monthly.

The other dividend cutter was a Portfolio member: Mutual Fund Alternative Blue Ribbon Income Fund (TSX: RBN-U, OTC: BLUBF). The diversified closed-end fund reduced its monthly rate to CAD0.055, beginning with the Feb. 14 disbursement. That’s roughly a 21.4 percent reduction from the prior rate of CAD0.07.

Management cited fallout from income trust conversions to corporations, many of which took place Jan. 1. In reality, most of its holdings had already made their moves, and Blue Ribbon is adjusting its disbursement to a level that better reflects the investment income it’s been receiving.

The move seems to have been expected by most investors, as the fund has since broken out to a new all-time high. It still yields roughly 6 percent at the lower payout rate and sells at a 4 percent discount to the net asset value of its generally high-quality portfolio.

Accordingly, I’m actually raising the buy target for Blue Ribbon Income Fund to USD11, as 2011 uncertainty has been lifted. Note that investors should be prepared for distribution reductions at other funds, as they, too, adjust to 2011 taxes. They may not occur. In fact, I fully expect dividend growth to resume across Canada in coming months, which should push fund payouts higher as well.

When you buy a fund, however, you’re essentially at the mercy of management decisions on what’s in the portfolio, which, in turn, determines what cash you’ll get. And Canadian managers are notoriously conservative, which means they generally have fewer compunctions about taking dividends down a notch if that’s what they feel is necessary to preserve capital and enhance long-term total returns. That’s why I prefer buying and holding a portfolio of individual securities to owning funds.

These distribution reductions are now fully reflected in these companies’ dividend and yield quotes. Unfortunately, there are still nine How They Rate companies with quoted dividend rates that are still based on pre-2011 payouts, despite announcing cuts in some cases months ago.

Here’s the roundup on each. These are primarily companies that elected to change the frequency of their distributions from monthly to quarterly, or which were already paying quarterly dividends.

Companies that pay monthly have by now declared their first dividends post-Jan. 1, 2011. Dividend payments made in January were declared in December and reflected a pre-taxation dividend rate. In contrast, February payments were declared in January and reflect post-2011 taxation dividend rates.

As the new rates are declared, they’re immediately reflected in quoted yields. The most recent payments for companies paying quarterly, however, were generally declared in December and paid in January. Until they declare their next payment, their posted yields are going to reflect the old, higher rate they paid as trusts, rather than the cuts they’ve announced when converting to corporations.

That could be as soon as this month for some. For others, however, the first quarterly payments won’t happen until March or April. As a result, their posted yields are going to remain higher than their true yields until then. Make sure to check any high-yield candidates you’re considering for purchase against the list below.

Boston Pizza Royalties Income Fund (TSX: BPF-U, OTC: BPZZF) should be the first of the nine to reflect its true yield. That’s because unlike the rest it’s elected to stay monthly with its dividend.

In a press release dated Dec. 20, 2010, the company announced it would remain an income trust, absorbing the new tax of 26.5 percent in 2011 and 25 percent in 2012. At the time, management also stated it would begin paying at a lower rate of CAD0.084 per month (CAD1.01 annually), with the first payment slated for shareholders of record as of Feb. 21. That dividend hasn’t been declared as of this writing. But it should be by mid-month at the latest. Meanwhile, Boston Pizza Royalties Income Fund, yielding 6.7 percent on its expected 2011 dividend rate, is a hold.

Bell Aliant (TSX: BA, OTC: BLIAF) alienated a huge chunk of its US investor base by insisting on cashing out anyone not meeting the definition of “qualified investor” under the Investment Company Act of 1940. It was the only one of 200-plus converting income trusts that didn’t simply give its US investors shares of common stock for their trust units, as it did to Canadians.

Management deserves credit for actually being able to execute the cash-out without creating a negative market event for the stock, as US investors have apparently been cashed out at a price between USD26 and USD27. That’s a stone’s throw from a two-year high. By taking its dividend quarterly, however, Bell Aliant has delayed the adjustment in its posted dividend rate, and therefore the yield number investors see when scanning newspapers and quote services. That dividend yield is currently shown at about 10.7 percent, based on a monthly payment of CAD0.2417 per share. The actual post-conversion rate, stated by the company many months ago, is just CAD0.475 per quarter. As a result, Bell Aliant’s true yield is just 7 percent.

Moreover, the first payment won’t be made until April, with the declaration expected in late March, though management is likely to reiterate its policy on Feb. 8, when it releases fourth quarter and full-year 2010 earnings and holds its conference call after the market closes.

I’d like to think that everyone is aware of the new rate and that yield-chasers aren’t jumping in based on the promise of a double-digit yield. Anyone that is, however, is in for a very rude shock. Sell Bell Aliant. There are better stocks to buy.

Big Rock Brewery Income Fund (TSX: BR, OTC: BRBMF) has also gone quarterly with its dividend, taking it to a rate of CAD0.20 per share from the CAD0.10 it paid monthly as an income trust. Again, this news has been widely available for some time and shouldn’t come as a surprise to anyone who’s kept up.

Moreover, Big Rock’s misleadingly high posted yield is only 7.6 percent and therefore not the eye candy that attracts heedless yield-chasers. The company is solid, as should be reflected by fourth-quarter and full-year 2010 earnings, to be released Mar. 24. Big Rock Brewery Income Fund yields 5 percent at its post-conversion rate and rates a hold.

Canfor Pulp Products (TSX: CFX, OTC: CFPUF) apparently had an eleventh-hour epiphany and decided not to cash out US investors. Instead, even those not meeting the 1940 Act definition of “qualified investor” should have received common shares for the trust units they formerly owned.

There still is, however, one very big piece of unfinished business: The dividend is still being quoted at a monthly rate of CAD0.25 per share, for a yield of nearly 20 percent. That’s despite management’s previous statement that it’s moving to a quarterly payment plan with an initial dividend of CAD0.35. That’s a 53 percent reduction in the dividend, for a yield of less than 10 percent based on current prices.

Canfor Pulp is slated to announce its fourth-quarter and full-year 2010 earnings on Feb. 9. At that point management is also likely to nail down for investors just what its post-conversion dividend will be and we may even see that number finally reflected in published yield quotations.

Two months ago I issued a sell recommendation for Canfor Pulp, mainly because I was worried about complications from the conversion and promised cash out of US investors. Again, that apparently didn’t happen. But I’m still considering Canfor Pulp Products a closed position in the Canadian Edge Portfolio.

Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) announced a year ago that it would take its dividend quarterly and down to a rate of CAD0.30. That rate, however, probably won’t be reflected until the first-quarter payment is declared (scheduled for May 10) with a payment at the end of June.

During the first quarter itself, the company will make two payments: the CAD0.1533 per share paid out on Jan. 31 and an additional “special” dividend to be declared at the same time the company releases its fourth-quarter and full-year 2010 results, which should be on or about Mar. 2. That’s a confusing payout schedule. All income investors really need to focus on, however, is the eventual quarterly dividend of CAD0.30, which equates to a current yield of about 5.8 percent.

As I’ve said before, management has set the payout at a very conservative level, making dividend increases extremely likely as it grows its successful franchise. Davis + Henderson Income Corp is a buy up to USD20.

FutureMed Healthcare Products Corp (TSX: FMD, OTC: FMDHF) also announced its prospective conversion to a corporation in early 2010, along with a cut in its payout from a monthly rate of CAD0.0771 to an expected new quarterly rate of CAD0.16875 per share. At the time, the move disappointed many investors (including me) who thought the growth of the company’s disposable nursing supplies business would mitigate the need for cuts. My view was that management was being overly conservative.

At this point, however, many investors appear very skeptical that the company can make even the lower tally, which equates to a yield of 9.8 percent. Meanwhile, the current yield level quoted by most services stands at more than 13 percent. A quarterly dividend will probably not be declared until the company reports its fourth-quarter and full-year 2010 earnings. Management has scheduled the announcement for Mar. 10, with a conference call on Mar. 11.

Until then, all we’re likely to get for this small company (market capitalization CAD106 million) is a lot of innuendo. The biggest positive is the high yield and price of just 88 percent of book value are pre-factoring in a lot of bad news that may yet be avoided. Futuremed Healthcare Products Corp is a hold for aggressive investors–but remember the true yield is a little less than 10 percent.

North West Company (TSX: NWF, OTC: NWTUF) was a rarity as a trust, paying on a quarterly basis. Its next scheduled ex-dividend date, however, isn’t until Mar. 29 with an estimated declaration date of Mar. 17. That roughly coincides with the Mar. 18 projected date for its fourth-quarter and full year 2010 earnings release. The current posted yield is 6.5 percent, versus an actual post-conversion yield of 4.6 percent.

Ironically, the company almost certainly could have afforded to maintain its trust dividend rate after converting. It controls a solid retail franchise in some of the most difficult-to-get places on earth, a business it’s been very successful expanding in recent years. The new lower yield, however, isn’t likely to attract many investors. Ironically, by trying to save cash to finance growth, management has made it more difficult to raise capital to grow. But investors have little to worry about from this ultra-conservative outfit. Hold North West Company.

Royal Host Inc (TSX: RYL, OTC: ROYHF) is another former trust with an outrageously high posted yield, nearly 14 percent. Management, however, announced in mid-December that the payment declared for Dec. 30 would be “the final distribution to unitholders.” It also stated that “while it is the intention for RHC (the company) to pay regular (quarterly) dividends, no assurance can be given as to whether RHC will pay dividends, or the frequency or amount of any such dividend.”

To date the only action by the company besides completing its conversion to a corporation has been an announced “normal course issuer bid” to buy up to 10 percent of the stock outstanding. Earnings will likely be announced on or about Mar. 9, at which time management should make a definitive statement on its dividend as well.

The company has suffered from a rising Canadian dollar over the past few years, as well as the US recession’s impact on tourism at its resorts and hotels. That makes the eventual amount of dividend a real wildcard. The 14 percent yield is pricing in a large cut. But no one should make the mistake of assuming that figure is in any way sustainable. And until we get the numbers, there’s no assurance Royal Host will pay a dividend at all. Royal Host Inc is a hold for speculators only.

Ten Peaks Coffee Company (TSX: TPK, OTC: SWSSF) is still showing it pays a CAD0.03 per share monthly dividend, for an overall yield of a little under 10 percent. Several months ago, however, the company announced a switch to a quarterly payout policy, with an initial payment of CAD0.0625 per share. That equates to an actual yield of a little less than 7 percent. The new rate should be sustainable at least for 2011.

Longtime readers know that I’ve been skeptical of this company for several years, due to competition in its decaffeinated coffee processing/marketing business and the impact of a rising Canadian dollar on its competitiveness. Those remain major challenges for post-conversion Ten Peaks, though at 67 percent of book value the near-term risk in holding the stock is low.

We’re looking at a Mar. 24 announcement date for fourth-quarter and full-year 2010 earnings, with a dividend declaration very likely in that time frame as well. Hold Ten Peaks Coffee Company.

As I mentioned in the January Canadian Edge, with conversion-related dividend cuts now well known the Dividend Watch List’s primary focus is on companies with potentially dividend-threatening challenges at their core businesses. We’ll get a better idea of who deserves to be on the list when fourth quarter and full year 2010 earnings are announced over the next two months. Meanwhile, here’s the List.

• Brompton Stable Income Fund (TSX: VIP-U, OTC: BVPIF)–Hold
• Canfor Pulp Products (TSX: CFX, OTC: unknown)–Hold
• Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF)–Hold
• FP Newspapers Income Fund (TSX: FPI, OTC: unknown)–Hold
• InterRent REIT (TSX: IIP-U, OTC: IIPZF)–SELL
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Hold
• Royal Host Inc (TSX: RYL-U, OTC: ROYHF)–Hold
• Superior Plus Corp (TSX: SPB, OTC: SUUIF)–Hold

Bay Street Beat

Eight members of the How They Rate coverage universe have announced fourth-quarter and full-year 2010 earnings as of press time.

Canadian Oil Sands Ltd (TSX: COS, OTC: COSWF), reporting for the first time as a converted corporation, offered a positive report based on cautious signs of progress overcoming its biggest problem as the share price lagged in 2010: waning investor confidence in Syncrude’s ability to ever begin to rein in the exorbitant costs of producing synthetic crude from bitumen.

Shares of Canadian Oil Sands, the sole asset of which is a 36.7 percent interest in the Syncrude joint venture, have surged since Jan. 25, the “day of rage” that superseded what was an Egyptian national holiday honoring police officers and set off what may turn out to be a regime-changing uprising in an extremely sensitive part of the world. Generally speaking higher oil prices are good for Canadian Oil Sands.

But the key for this company is whether it can establish some operational consistency at its cokers and finally begin to make meaningful progress in its effort to bring down costs and simultaneously approach the promise of 500,0000 barrels per day (bpd) of production by 2020. According to CEO Marcel Coutou, Syncrude averaged “more than 350,000 barrels per day” during November and December of 2010. “Nameplate” capacity is 375,000 bpd.

Operating costs for the year were CAD36.76 per barrel, up from CAD35.29 in 2009. A 24 percent annual CAPEX increase should, over the long term, reduce mining costs, which were the source of the increase maintenance expenditures in 2010.

Cash flow–growth of which is critical for any new projects that will help Syncrude meet its production potential–fell 32 percent to CAD222 million (CAD0.46 per share) from CAD328 million (CAD0.68 per unit) in the fourth quarter of 2009 as expenses rose. Most of these expenses were tied to unexpectedly long turnaround times for repairs.

Cash flow for the year, however, was up 123 percent, as production and realized prices rose in response to a reviving global economy. Oil Sands earned CAD311 million (CAD0.64 per share) in the fourth quarter, up from CAD96 million (CAD0.20 per unit) a year ago. Revenue was up 4.6 percent to CAD936 million.

Syncrude expects to produce 110 million barrels (301,400 bpd) in 2011, which projects to 40.4 million barrels (110,700 bpd) to Canadian Oil Sands. Management forecast CAD927 million for capital costs, CAD622 million for major projects, CAD305 million for scheduled upkeep of existing equipment. That’s more than Bay Street anticipated, but the Egyptian mini-shock, demonstrating as it does the greater relative impact a sudden price rise has for high-cost operators such as Syncrude, seems to have soothed at least some worries; the stock has received one upgrade in the past week, to “market perform,” while overall response to fourth-quarter and full-year 2010 numbers was similarly tepid.

The potential for Canadian Oil Sands right now is that it reverts to its prior pattern of trading with the price of oil. Events have pulled it higher in the short term; performance will make it a sound long-term investment. Canadian Oil Sands (0 buy, 12 hold, 3 sell on Bay Street) is a buy when it comes back to USD28 or below.

Canadian National Railway (TSX: CNR, NYSE: CNI) boosted its distribution 20.4 percent following a 19 percent rise in fourth-quarter earnings, a 42 percent increase in free cash flow. The railway saw an 18 percent surge in volumes, reflecting a resurgent global economy’s hunger for Canadian resources. Canadian National Railway (9 buy, 17 hold, 0 sell) is a buy up to 70.

Canadian Pacific Railway (TSX: CP, NYSE: CP) reported a 27 percent increase in fourth-quarter earnings, as resource volumes surged along with a recovering global economy. Management expects metallurgical coal volumes to continue rising through 2011. Analysts on Bay Street maintained their ratings on the railway across the board following the earnings announcement.

Canadian Pacific Railway (12 buy, 15 hold, 0 sell), trading 10 percent above its buy target, is a hold pending a dividend increase.

Imvescor Restaurant Group (TSX: IRG, OTC: IRGIF) reported that system sales rose 0.1 percent the fourth quarter but declined 1.8 percent for full year. Same-store sales dropped 2 percent in 2010. No Bay Street analysts cover Imvescor Restaurant Group, currently a hold.

Manitoba Telecom Services (TSX: MBT, OTC: MOBAF) reported that fourth-quarter Internet revenue grew 9.7 percent at its Allstream unit. The company also won 52 enterprise contracts. Bay Street’s reaction (3 buy, 7 hold, 2 sell) was to keep current ratings in place. Manitoba Telecom Services is a buy up to USD28.

Oriented strandboard (OSB) maker Norbord (TSX: NBD, OTC: NBDFF) reported positive earnings in the fourth quarter on higher prices for its and improved demand, as housing markets in North America and Europe stabilized. Cash flow from Europe doubled.

Norbord (6 buy, 2 hold, 2 sell) generates a decidedly mixed reaction on Bay Street, though all who cover it maintained their ratings in the wake of fourth-quarter and full-year 2010 earnings. Still waiting for a real recovery in the US and European housing markets, Norbord rates a hold.

Potash Corp of Saskatchewan (TSX: POT, NYSE: POT) has blown well past where we recommended exiting it, as the stock is now rocketing back toward the USD200 per share level it surveyed in mid-2008. The stock (16 buy, 11 hold, 0 sell) generated a solid return for subscribers who followed our original advice to buy below USD100 then sold around USD145 at the peak of the BHP Billiton (NYSE: BHP) takeover frenzy.

Blowout earnings on rising fertilizer prices and weather-related pressures on agricultural supplies suggest another solid year for Potash Corp, which controls an increasingly important fertilizer input.

If you didn’t take our advice and still hold Potash Corp, congratulations, your profit is even more impressive. Consider booking at least a portion of your gain.

Rogers Sugar Inc (TSX: RSI, OTC: RSGUF) reported a 2.1 percent increase in sales volume for the fourth quarter. Improved export levels offset weaker results for its liquids business, though overall distributable cash flow was flat. A recent surge in sugar prices should support a higher valuation. Rogers Sugar (0 buy, 4 hold, 0 sell) is a buy up to USD5.

Tips on DRIPs

On Jan. 26 Baytex Energy Corp (TSX: BTE, NYSE: BTE) opened its dividend reinvestment plan (DRIP) to US investors. Baytex’s DRIP, like other plans of its kind, will allow shareholders to reinvest their monthly cash dividends in additional shares. According to a press release announcing the deal:

The common shares to be acquired under the DRIP will, at the election of Baytex, be issued from treasury or purchased in the open market at prevailing market prices. Under the DRIP, common shares acquired from treasury will be issued at a 5 percent discount to the weighted average trading price of the common shares, calculated from the second business day after the dividend record date to the second business day prior to the dividend payment date. Baytex’s current intention is to issue common shares from treasury under the DRIP. Pursuant to the terms of the DRIP, Baytex reserves the right at any time to change or eliminate the discount on common shares acquired from treasury.

Shareholders who hold their common shares through a broker, investment dealer, financial institution or other nominee (commonly referred to as beneficial shareholders) can contact the party holding their common shares to request that their shares be enrolled in the DRIP. Beneficial shareholders should be aware that (i) certain brokers, investment dealers, financial institutions or other nominees may not allow participation in the DRIP and (ii) certain brokers and investment dealers may reinvest dividends received by their clients by purchasing additional shares in the open market at prevailing market prices (in which case such clients would not receive the discount offered under the DRIP for common shares acquired from treasury). Neither Baytex nor the plan agent (Valiant Trust Company) is responsible for monitoring or advising which brokers, investment dealers, financial institutions or other nominees allow participation in the DRIP.

Shareholders who hold a physical share certificate to evidence their ownership of common shares (commonly referred to as registered shareholders) can enroll in the DRIP by delivering a completed authorization form to Valiant Trust Company. Registered shareholders can access a copy of the authorization form on our website at www.baytex.ab.ca, on Valiant’s website at www.valianttrust.com or by contacting Valiant at 1-866-313-1872.

More details are available here: http://www.baytex.ab.ca/investor/drip-information.cfm.

Baytex joins other New York Stock Exchange-listed Canadian companies that extend the convenience of a DRIP to US investors. US securities laws restrict participation in DRIPs sponsored by foreign 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.

Two CE Portfolio recommendations, Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE) and Provident Energy Ltd (TSX: PVE, NYSE: PVX), do allow US investors to participate in their respective DRIP offerings, with certain limitations. Information about Penn West’s plan is available here. Click here for more information about Provident’s DRIP.

Penn West, Provident and now Baytex, because they’re listed on the NYSE, have therefore opted into US filing and registration requirements. It’s basically a matter of how much overhead expense trusts are willing to absorb.

Conservative Holding Atlantic Power Corp (TSX: ATP, NYSE: AT), which listed on the NYSE in July 2010, continues to “evaluat[e] options for a Dividend Reinvestment Program” and “hopes to have this option available to shareholders in the future.” NYSE-listed Aggressive Holding Enerplus Corp (TSX: ERF, NYSE: ERF) has a DRIP for Canadian investors but has not opened it to US investors.