After scoring record returns in 2009 and 2010, the Canadian Edge Portfolio is also off to a good start in the first two months of 2011. On average, current Holdings are up 8.5 percent thus far this year, bringing their total returns since the Mar. 9, 2009, market bottom to 247.5 percent.

With gains like these it’s fair to ask how much longer the good times can possibly roll without a serious correction. After all, higher stock prices mean rising expectations, which, in turn, are much easier to disappoint.

We’ve seen a few Portfolio companies this earnings season come in with at least some numbers that were below what Bay Street was apparently expecting. Those stocks tumbled, though overall reports indicated no risk to dividends and that their underlying businesses are still healthy.

I highlighted two in a Feb. 23 Flash Alert, Just Energy Group Inc (TSX: JE, OTC; JSTEF) and Yellow Media Inc (TSX: YLO, OTC: YLWPF). Since then Just Energy has more or less recovered the ground lost in the three trading days following its Feb. 10 announcement, which saw the stock fall from nearly USD16 to a low of a little over USD14.

There’s been no hard news since the earnings release. Investors, however, have come to realize that the company is still rock-solid and the dividend is in absolutely no danger at this time. Nine-month cash flow covers the payout by a 1.2-to-1 margin, and the company’s fiscal fourth quarter, which ends Mar. 31, appears to be quite strong, with a return to normal weather lifting gross margin and cash flow. Moreover, the company is still growing its customer base in unregulated natural gas and electricity markets in the US and Canada.

Those interested in reading more about Just Energy’s results should consult the Flash Alert. Meanwhile, still yielding more than 8 percent and trading for 71 percent of sales, Just Energy Group remains a buy up to USD16.

As for Yellow Media, it’s clearly the stock stirring the most angst among Canadian Edge readers right now. It’s not hard to see why. Last November management reported third-quarter earnings that appeared to indicate the company’s growth rate was finally starting to get traction. Revenue was up 5 percent year over year, cash flow was stable and demand for Internet offerings accelerated. Coupled with the company’s successful conversion to a corporation on Nov. 1, the stock price had enough catalysts to get back above USD6.

Yellow basically ran in place in January. Then came the Feb. 10 release of fourth-quarter and full-year earnings. The stock took a two-day plunge from north of USD6 to around USD5.60, stabilized for a couple of weeks and then headed south again, touching a low of close to USD5 before recovering back to USD5.35 on Thursday of this week.

The primary driver for Yellow stock this year is whether management can hit its cash earnings guidance for 2011 of CAD0.95 to CAD1 per share. That’s the level set when the conversion to a corporation was announced last year, and it’s what the current monthly dividend rate of 5.42 cents Canadian is calibrated for.

During the fourth-quarter conference call CEO Marc Tellier stated, “For Q4, we earned on a cash per share basis adjusted 24 cents per share or 96 cents annualized, which pegs the payout based on 65 cents at 69 percent, exactly where we expect it to be.” He also affirmed the company’s fourth quarter free cash flow was on target for an annualized CAD600 million, again in line with prior projections.

A lot of media attention was paid to the fact that Yellow posted negative earnings per share, the result of “charges against its earnings related primarily to acquisitions.” In reality, the CAD2.3 million loss is a non-cash item that’s basically meaningless to dividend safety. So is the fact that last year’s fourth-quarter earnings per share were 25 cents.

Rather, stated earnings per share are a figure Yellow management will try to manipulate lower in order to minimize taxes. When they sit down to consider what the dividend rate will be, they won’t spend one second considering earnings per share.

They’ll look at “cash earnings per share”–which adds back in the non-cash expenses like amortization and goodwill–and free cash flow. Those are the numbers that funded dividend growth in the past, and management has been quite clear they’re what’s important going forward.

Analysts who study Yellow, of course, know this full well. That’s why posting a loss didn’t change anyone’s opinion on Bay Street, where opinion remained one “buy,” nine “holds” and one “sell” recommendation.

As I pointed out in the Feb. 23 Flash Alert, not everything was perfect at Yellow. The cost of the company’s conversion to a corporation involved CAD18 million in rebranding expenses and was therefore more expensive than other trusts’ conversions. Given Yellow’s conversion to an all-media directory advertiser, however, ditching the Yellow Pages brand was a move it would have had to make anyway. And in any case, the CAD48 million total conversion cost is a one-time expense.

Some analysts on the fourth-quarter conference call appeared troubled by the erratic nature of web-based advertising traffic and revenue, as opposed to the ultra-steady print directory model of the past. That may be causing some to attach a lower market value to web-based revenue (29 percent of total revenue), which is now reflected in a lower share price for Yellow.

Those interested in more details of the earnings release will want to revisit the Flash Alert. (If you’re reading on www.CanadianEdge.com you can click through the hyperlinked text, while those of you reading a pdf will have to get on the web.) But the bottom line is nothing has really changed about this investment. It’s still a bet on the future of Internet advertising with a management that’s dedicated to sharing a large percentage of the profit with shareholders as dividends.

As long as the post-conversion dividend holds, the stock is going higher in addition to paying a yield that’s now over 12 percent. That makes Yellow Media a buy up to USD8 for those who can handle the risk and volatility–and hasn’t already taken a position. It’s never a good idea to load up on any one situation, no matter how good it looks. There’s just too much potential to make emotional (and therefore bad) decisions when you double down.

Beating Expectations

The cases of Just Energy and Yellow Media demonstrate what happens when investor expectations are disappointed even a little in a market that’s still mostly scared of its own shadow. Ironically, virtually every other CE Portfolio pick reporting thus has gone the opposite way–posting numbers that topped expectations and therefore triggered a jump in shares.

Cineplex Inc (TSX: CGX, OTC: CPXGF), for example, was off to the races in the weeks that followed its Feb. 10 earnings announcement. As I pointed out in the Feb. 23 Flash Alert, business conditions were hardly ideal for the company. Overall attendance dropped 7.9 percent during the fourth quarter and was down nearly a percentage point for the year.

The culprit was subpar fare put out by Hollywood, including the much-anticipated latest installment of the Harry Potter series that far underperformed the previous movie. What pleasantly surprised Bay Street was how little that mattered to Cineplex’ bottom line. Rather, the company wound up with double-digit gains in net income and higher margins, thanks to what amounts to a successful up-sell to 3D and IMAX fare.

The stock has since backed off its high but is still slightly above my buy target. Wait on a move to USD23 or lower before jumping in on Cineplex Inc. Check out the Flash Alert for more earnings analysis.

Three of the other four stocks whose earnings are highlighted in the Flash Alert have also moved to higher ground since. ARC Resources Ltd (TSX: ARX, OTC: AETUF) got as high as USSD29.29 on Feb. 28 from USD25 and change when it announced numbers on Feb. 11.

Keyera Corp (TSX: KEY, OTC: KEYUF) moved from USD35 and change to nearly USD39 following its Feb. 18 announcement. And Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE) rocketed up a couple points as well after its Feb. 17 release.

In contrast to Cineplex, however, I’ve lifted buy targets for this trio. That’s because ARC, Keyera and Penn West showed something in their fourth-quarter numbers that justifies paying a higher price for them. For more on my reasoning, ARC and Penn West are highlighted in this month’s Feature Article. Keyera Corp is a High Yield of the Month pick, along with new Aggressive Holding Acadian Timber Corp (TSX: ADN, OTC: ACAZF).

I’ve also raised targets for AltaGas Ltd (TSX: ALA, OTC: ATGFF), Atlantic Power Corp (TSX: ATP, NYSE: AT), Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF) and Vermilion Energy Inc (TSX: VET, OTC: VEMTF). Earnings for AltaGas are highlighted below.

Brookfield Renewable’s results are reviewed in the Feb. 23 Flash Alert. At that time I didn’t raise the buy target, for a couple of reasons. One was the unit price seemed to be making almost daily highs. The other was a brokerage downgrade that prompted me to review the numbers in more detail.

Since then, however, the unit price has backed off a bit, and I’ve been satisfied by the company’s progress on its various projects. I was also heartened by S&P’s decision to reaffirm the power producer’s credit rating. The company once again meets all six CE Safety Rating System criteria, and it’s not taxable until 2015.

The upshot is I’ve raised my buy target on Brookfield Renewable Power Fund to USD22, a price at which the company–still organized as an income trust–yields around 6 percent. Note that it currently trades slightly above that, in part because of the appreciation of the Canadian dollar. If you don’t already own the stock, be patient.

As for Atlantic Power, it won’t release its fourth-quarter and full-year 2010 numbers until Monday, Mar. 21. The company’s partners in the Idaho Wind Partners project, however, reported on February 3 that the 183 megawatt facility is now producing and selling energy to utility Idaho Power under a 20-year sales contract. That means cash will begin to flow in the first quarter from Atlantic Power’s 27 percent interest and that management is meeting its guidance for both the project and its long-term strategy.

Atlantic Power certainly isn’t as cheap as it was in November 2008, when it hit an all-time low of USD4.61–ironically on the same day it last boosted its dividend. But with its plans on track, it is a low-risk way to pick up a 7 percent plus yield, paid monthly. And the value of that dividend rises every time the Canadian dollar picks up ground versus the US dollar. Atlantic Power Corp is a buy up to USD15 on the New York Stock Exchange (NYSE) for US investors and up to CAD15 on the Toronto Stock Exchange (TSX) for Canadian investors.

Below I’ve listed two total return numbers for all of the Portfolio holdings, including the mutual funds. The number on the left is the total return since March 9, 2009 when the markets bottomed. The second is the total return from the beginning of 2011 through the close on Mar. 3.

Clearly, we’ve seen some staggering gains, including for the stocks listed above. The key, however, is that these companies still have the ability to generate worthwhile total returns even after these gains.

They’re not as cheap as a couple of years ago–and their current yields are more in the upper single-digit range rather than double-digits. But they’re also deserving of those higher valuations, after weathering the worst market/economic/credit crisis in 80 years with solid businesses. And with the economy improving and trust conversions behind them, they’re poised for dividend growth as well.

The latter is the most important catalyst for pushing dividend-paying stocks higher, as each boost represents a higher baseline market price. No one should pay more than our buy targets for them. But if you get them at or below those prices, solid long-term returns look assured. And if you can catch them when an ephemeral number has disappointed the market–definitely the case with Just Energy and Yellow Media this time around–you’ll do better still.

Aggressive Holdings

• Acadian Timber Corp–187.7%, 40.3%
• Ag Growth International–338.1%, 9.0%
• ARC Resources Ltd–243.2%, 8.3%
• Chemtrade Logistics Income Fund–406.4%, -4.9%
• Daylight Energy Ltd–230.4%, 9.6%
• EnerCare Inc–91.2, 5.3%
• Enerplus Corp–185.4%, 5.5%
• Newalta Corp–560.6%, 12.6%
• Parkland Fuel Corp–189.2%, 6.7%
• Penn West Petroleum Ltd–373.7%, 18.2%
• Perpetual Energy Inc–142.0%, 9.7%
• Peyto Exploration & Development Corp–371.9%, 9.3%
• PHX Energy Services Corp—373.1%, 15.3%
• Provident Energy Ltd—408.9%, 9.5%
• Vermilion Energy Inc–220.3%, 10.1%
• Yellow Media Inc–85.9%, -9.1%

Conservative Holdings

• AltaGas Ltd–226.4%, 19.3%
• Artis REIT–309.3%, 6.9%
• Atlantic Power Corp–278.5%, 6.3%
• Bird Construction Inc–233.3%, 1.0%
• Brookfield Renewable Power Fund–113.4%, 7.6%
• Canadian Apartment Properties REIT–136.4%, 13.5%
• Cineplex Inc–153.4%, 6.3%
• CML Healthcare Inc–42.9%, 2.5%
• Colabor Group–113.7%, 3.3%
• Davis + Henderson Income Corp–238.3, 13.3%
• Extendicare REIT–372.4%, 25.1%
• IBI Group Inc–114.3%, 17.3%
• Innergex Renewable Energy Inc–243.0%, -1.5%
• Just Energy Group Inc–136.0%, 3.8%
• Keyera Corp–295.2%, 8.0%
• Macquarie Power & Infrastructure Corp–219.6%, 1.0%
• Northern Property REIT–194.5%, 2.0%
• Pembina Pipeline Corp–196.1%, 4.4%
• RioCan REIT–223.8%, 11.7%
• TransForce Inc–604.7%, 9.1%

Mutual Fund Alternatives

• Blue Ribbon Income Fund–277.6%, 9.0%
• EnerVest Diversified Income Trust–221.5%, 5.5%
• Precious Metals & Mining Trust–300.3%, 1.0%

For reference, the average gain thus far this year (through Mar. 3) for Conservative Holdings is 8.1 percent and 9.7 percent for Aggressive Holdings. That’s already a couple points better than the S&P 500. The total return of 222.3 percent for the Conservative and 275.5 percent for the Aggressive Holdings since the bottom on Mar 9, 2009, meanwhile, compares to a 65 percent return for the S&P 500.

The Numbers

The foundation for those gains is, of course, strong underlying businesses. That’s what enabled these companies to survive the maelstrom of 2008 and ride the recovery in 2009 and 2010. And it’s what enabled the income trusts among them to successfully convert to corporations, generating a second windfall for their investors.

Looking ahead, strong underlying businesses are still the key to scoring big returns with these stocks, this time as dividend growth accelerates. The first quarter of 2010 is already more than two-thirds over. But fourth-quarter numbers still provide the most valuable clues on business health, along with management conference calls that invariably include 2011 and first-quarter guidance.

That also goes for the companies listed at the bottom of this document that won’t report fourth-quarter numbers until even later in the month. Oil and gas producers, meanwhile, are in the process of releasing results of the mandatory independent assessment of their reserves under requirements captured in what’s referred to as an NI 51-101 report, mostly conducted by petroleum consultancy Sproule Associates Ltd, providing critical clues on where they should be valued in the market place.

Below I round up the numbers of companies that reported their fourth-quarter and full-year 2010 earnings numbers between the time the Feb. 23 Flash Alert was posted and this issue of CE went to the editing stage. Earnings and reserve data of the Aggressive Portfolio oil and gas producers reporting is detailed in this month’s Feature Article. Included are numbers for ARC Energy, Daylight Energy, Penn West Petroleum and Vermilion Energy.

AltaGas Ltd (TSX: ALA, OTC: ATGFF) is still trading above my newly raised buy target of USD24, which it surpassed soon after the company’s Feb. 24 fourth-quarter earnings release. Key numbers included an 8.2 percent boost in cash flow per share and a 9.4 percent jump in funds from operations–the account from which dividends are paid–to CAD0.70 per share. The latter took the fourth-quarter payout ratio down to 47 percent, despite the fact that the company has been paying taxes since converting to a corporation in mid-2010. Operating income adjusted for mark-to-market accounting ticked up 11.2 percent for the quarter.

Keeping that pace of growth going for an energy infrastructure company like AltaGas means continually finding new cash-generating assets to build and/or buy. The company has a CAD2 billion pipeline of “organic” growth projects that it reported strong progress on during the quarter. Those include a gas processing plant slated for startup in the first quarter 2012, another processor attached to a gas gathering system set for startup in late 2012 and a new pipeline expected to be ready by mid-2011.

The company also completed a 15 megawatt gas power plant on time and under budget and boosted its utility rate base by 15 percent, thanks to system upgrades and growth. And it announced it will build a CAD30 million pipeline in northeastern British Columbia in partnership with Provident Energy Ltd (TSX: PVE, NYSE: PVX), which will further boost gas processing operations.

Despite expansion costs, debt-to-capitalization was cut to 42.8 percent from 49.2 percent a year ago, while equity raises were minimal at just a 2.8 percent increase in outstanding shares. This ability to finance asset growth without raising capital is one reason AltaGas’ conservative managers elected to reduce the distribution from CAD0.18 to CAD0.11 when the company converted to a corporation.

That pain, however, is rapidly translating into potential for strong gains in cash flows and eventually dividend growth, which in turn makes further share price gains a high percentage bet. Buy AltaGas Ltd on dips to USD24 if you haven’t yet.

Artis REIT (TSX: AX-U, OTC: ARESF) posted a 72.1 percent boost in revenue, a 66.6 percent jump in property net operating income and a 76.1 percent jump in funds from operations for the fourth quarter over last year’s levels.

It also boosted profits on the properties it’s owned for more than a year, thanks to a favorable combination of high occupancy and stable-to-rising rents. And it cut debt-to-gross book value to 47.4 percent, one of the most conservative ratios in the Canadian real estate investment trust industry.

Realizing that rapid rate of growth was, of course, the result of utilizing a low cost of equity capital (thanks to a high stock price) to expand Artis’ portfolio dramatically. CEO Armin Martens called 2010 “a robust year for acquisitions…and expansion into the U.S.” These new assets now comprise about 6 percent of the overall portfolio and are very high quality, leased almost entirely to blue chip businesses.

The cost of issuing equity is having more units outstanding, which means some dilution in the near term. Artis’ payout ratio, for example, stands at 93 percent for the fourth quarter of 2010. The good news is in such property purchases, the costs are mostly borne up front, with the payoff coming over time, so long as the acquisitions were good ones. In addition, the company has suffered from holding relatively large cash balances with which to do these deals, another factor that won’t continue to negatively impact earnings as purchases close.

Artis management is still planning to do more deals, which is likely to keep the payout ratio higher than investors have been used to seeing it. And while its revenue streams are far more diversified in the past, there’s still a large reliance on office properties (47 percent property net operating income) and the province of Alberta (59 percent). That makes the REIT still quite dependent on the health of Canada’s energy patch, which in turn has kept the unit price a bit more volatile than other REITs. That relationship to the energy patch has, however, been a good thing in the past year and figures to continue so in 2011.

Meanwhile, Artis continues to diversify into high-quality properties elsewhere selling at value prices. That’s a formula that will keep the value of the company climbing, though until acquisitions slow down dividend increases are less likely. Artis REIT is still a buy up to my target of USD14.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) isn’t growing nearly as fast as Artis. Rather, its primary appeal remains an ultra-conservative financial and operating strategy that ensures its distribution will remain intact almost no matter what happens in the Canadian property market.

The company realized both a 5.1 percent increase in revenue and a boost in net operating income margin from 53.8 percent to 54.4 percent in the fourth quarter, which is traditionally seasonally weak given that apartment owners in Canada typically cover heating costs. The payout ratio for the quarter based on net funds from operations came in at 92.1 percent but was just 82.5 percent for the full year, down from 88.5 percent last year. Average monthly rents rose 2.8 percent, while occupancy rose to 98.4 percent from an already lofty 98.1 percent a year ago.

On the balance sheet side, the REIT completed CAD150 million in mortgage refinancings at an average interest rate of just 3.78 percent and maturity of 8.2 years. That’s a massive savings and reflects management’s policy of continuing to rejigger its commitments to take advantage of market conditions and cut debt costs. Reflecting the high portfolio quality, the company reported strong rent growth in all markets except Alberta, which remains burdened by oversupply and the deliberate recovery of energy patch spending. Even there, however, the company has been effective at cutting expenses and holding margins strong.

That’s been the secret to the REIT’s 20 consecutive quarters of stable or improved net operating income growth, and it looks set to produce similar results going forward. The only problem with Canadian Apartment Properties is price, which is now well over USD19 and my buy target of USD18. I won’t raise the target until the REIT boosts dividends. If you don’t own it, be patient.

CML Healthcare Inc (TSX: CLC, OTC: CMHIF) set off a stampede out of its stock in the first hour following its release of fourth-quarter and full-year 2010 earnings. With management affirming the post-Jan. 1 conversion dividend level for at least the rest of 2011, the 10 percent drop is unlikely to extend much further. And if it should, it’s likely to be reversed within a relatively short time.

Both fourth-quarter and full-year distributable cash flow covered the pre-conversion payout by roughly the same margin they did a year ago. And with the new dividend roughly 30 percent below the old one, there’s no reason not to expect solid coverage in 2011, despite the imposition of cash taxes. There were, however, several troubling signs in the numbers.

First, after a couple of quarters of improvement, US operations appear to have resumed their deterioration, despite some signs of falling unemployment. Management achieved its targeted 2010 cost savings for US operations, and there’s room to do more. But reimbursements were also reduced, delivering a blow to revenue that will extend into 2011. That led management to write off CAD32.1 million of goodwill and another CAD19.1 million in “long-lived assets.”

These are of course non-cash charges that have no impact on CML’s ability to pay dividends. But they demonstrate the continuing challenges the company faces in this country, particularly with healthcare legislation still unsettled and Medicare in a cost squeeze. The company also continues to suffer from misperception in some US markets–notably Connecticut–that its radiological testing methods are somehow harmful to health.

The good news is 94 percent of margins are made in Canada, which is more than enough to cover the distribution even if US operations continue to falter. Operations in the home country are still quite healthy, with the company expanding facilities and enjoying steady government-guaranteed rate increases. As long as that remains the case, CML will weather the woes affecting its US operations.

Canadian revenue inched ahead 2.7 percent in the fourth quarter, though higher costs slightly reduced cash flow margin, and therefore cash flow. Those costs should prove mostly temporary, as they include the expense of converting to a corporation, expansion costs and adjustment to a regulatory change.

The problem, however, is it will be impossible for CML to grow as long as its US operations are slipping. Revenue south of the border, for example, was down more than 30 percent in the fourth quarter, eating away cash flow by more than two-thirds. And unfortunately, the factors bringing those figures down appear to be more intractable. On top of that, the company’s debt burden has risen by 9 percent over the past year, though there are no significant maturities until two outstanding loans totaling CAD273 million come due in February 2013.

At the very least, these numbers dictate change in my advice for CML Healthcare to a hold. I’ll have more on the stock next week in a Flash Alert, when I review companies reporting numbers next week.

Extendicare REIT (TSX: EXE-U, OTC: EXETF) has shot up more than 10 percent since its Mar. 2 announcement of fourth-quarter earnings. I suspect that’s mainly because the numbers affirm the company’s dividend strength.

Revenue was up 4.6 percent in the fourth quarter, while cash flow surged 19.2 percent excluding currency swings. Cash flow margins rose to 12.8 percent, up from 11.4 percent. That added up to a drop in the payout ratio to just 62 percent of adjusted funds from operations. One reason for the strong numbers: Average daily revenue rates for Medicare Part A rose 12 percent in the fourth quarter over last year’s level, while Medicare Part B rates were lifted 5.9 percent. That enabled the company to easily absorb the cost of taking a USD13.5 million reserve for self-insured general and professional liabilities for pre-2009 legal claims.

US operations are now 73 percent of total cash flow. That limits the impact of the Canadian trust tax, one reason Extendicare has been able to absorb its impact without changing from an income trust or cutting distributions. It also makes the company more exposed to US health care law, policies on Medicare disbursements and the health of the US economy.

These numbers, however, signal Extendicare occupies a  solid niche and is thriving in a market that’s very tough for many healthcare companies. The only real problem now is price, as the shares have now spiked above my buy target of USD11. I expect we’ll see that level again. If you didn’t get in on my original recommendation, be patient.

RioCan REIT (TSX: REI-U, OTC: RIOCF) saw its funds from operations rise 29 percent in 2010, and 21 percent on a per unit basis to CAD1.45. Fourth-quarter funds from operations rose 25 percent to CAD0.35, pushing the payout ratio down to 99 percent in what’s traditionally a seasonally weak period.

These results are the product of management’s aggressive pace of acquisitions in the past couple years, which have seen it use low cost capital to buy an array of high-quality properties from distressed owners in the US and Canada. And the REIT has also run its properties increasingly efficiently and profitably, boosting net operating income by 3.8 percent. Encouragingly, the US portfolio boosted average base rent by 2 percent in the fourth quarter over third-quarter levels. Canadian occupancy came in at 97.3 percent, up from 97 percent at the end of the third quarter. US occupancy, meanwhile, rose to 98.2 percent from 98.1 percent sequentially and 97.4 percent a year earlier.

The company retained 93.3 percent of expiring leases, up from 89.8 percent a year ago in a clear sign of improving portfolio health. Renewing leases sported an average rent increase of 4.5 percent in the fourth quarter. The company maintained first rate portfolio quality, with national and anchor tenants rising to 85.9 percent of annualized rental revenue from 84.5 percent. And no single renter comprised more than 4.6 percent of annual revenue.

In short, RioCan’s plans are panning out, even as it maintains operating and financial strength. Looking ahead, management expects profitability of properties to rise further from increased efficiencies. That makes RioCan REIT worth buying at USD24 or lower if you haven’t yet.

TransForce Inc (TSX: TFI, OTC: TFIFF) delivered two bits of bullish news to shareholders last month. On Feb. 23 the company completed its acquisition of Dynamex Inc, a deal that will immediately boost earnings while expanding the company’s reach to the US and expertise to a range of package and courier functions.

The next day TransForce announced robust fourth-quarter numbers, featuring a 9.2 percent jump in revenue (excluding the automatic fuel cost pass through to customers) and a boost in cash flow margins to 14 percent, up from 12.3 percent a year ago.

The result was a 17.2 percent jump in fourth-quarter net income, adjusted for one-time items, and a drop in the transport and logistics company’s payout ratio to just 45 percent.

The keys to growth were well-timed acquisitions of ATS Retail Solutions in November 2009 and Speedy Heavy Hauling in August 2010, both of which immediately added to profits and expanded the company’s reach and ability to grow. That’s the same formula TransForce has followed since I began following the company in mid-2004 as a consolidator of Canada’s dispersed transport and logistics industry. And there’s a lot more room to grow the same way, particularly with many competitors reeling from the appreciation in the Canadian dollar, the still-sluggish US economy and now rising fuel costs.

Remarkably, TransForce achieved its growth last year while reducing debt by CAD74 million, bringing its total debt-to-equity ratio down to 1.04-to-1, from 1.33-to-1 last year. There’s now no meaningful debt maturing until 2015. Nor did the company issue much equity, as total shares outstanding rose less than 0.1 percent during the 12 months ending Dec. 31, 2010.

Since they were announced, the numbers have triggered volatility in TransForce share price but it’s still below my buy target of USD14. The stock is up five-fold from its Mar. 13, 2009, low but still 20 percent below its all-time high, reached in February 2006 when it was arguably a much less valuable company. Buy TransForce up to USD14 if you haven’t yet.

Moving to the Aggressive Holdings, Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) has shed about 10 percent of its value since announcing fourth-quarter earnings on Feb. 24. One reason: a downgrade from research house TD Newcrest to “hold.” During the conference call, the analyst seemed concerned about the company posting lower sodium chlorate sales despite what appeared to be tight market conditions. CEO Mark Davis explained that the chlorate market is “not usually a spot market,” but that the company sells “to the customers (they) have.” He went on to state two customers took less volume than anticipated due to “their own operating issues,” and that “if the market stays as tight” the company “can probably replace those sales in the future” though they “couldn’t do it in the fourth quarter.”

The same analyst then asked if those issues with the customers had been resolved, prompting the response that one had and the other “had a tank rupture and pulp fill at their facility” with no “specific timeline” for having it fixed. The analyst also asked about whether previous guidance on cash flows from international operations still held (management said yes) and what a new byproduct contract would yield in terms of sulphuric acid production. Finally, he asked about the possibility of a dividend increase, to which Davis responded that while the company had “no problem maintaining” the current payout, the company had “no intention to increase it short-term.”

That may have been the answer that prompted the downgrade, given the gains in the shares recently. The analyst, however, still maintains a target price of CAD15 per unit, well above Chemtrade’s current price. As for the numbers themselves, the fourth-quarter payout ratio rose to 107 percent, as the cost of the outage of the Beaumont, Tex., plant and continued problems with raw material supplies from Vale (NYSE: VALE) pushed up expenses. That problem, however, won’t extend past the fourth quarter, as Beaumont has been back up and running now since November. The company also expects to recover at least some of the business losses under an “interruption” policy.

As for the chemicals market, it remains strong and the company has been able to re-up contracts with several large customers. That suggests much more robust results going forward, allowing management to deploy cash for capital improvements and balance sheet strengthening while easily covering the current dividend rate.

Is Chemtrade worth buying now despite management’s ruling out a dividend increase in the near term? In my view, an 8.6 percent yield that’s well protected by profits is always a boon. And while the payout may take a while to rise, the value of the business will grow as cash flows rise.

Accordingly, I’m holding my buy target on Chemtrade Logistics Income Fund at USD15 for those who don’t already own it.

EnerCare Inc (TSX: ECI, OTC: CSUWF), formerly known as Consumers’ Waterheater Income Fund, announced its fourth-quarter and full-year 2010 earnings on Feb. 23. Since then the stock has basically been range-bound, consolidating the late-year run-up it enjoyed through January. That’s not surprising, given the general lack of surprises in the numbers.

As expected, EnerCare saw a solid improvement in its core waterheater rental business, as new marketing initiatives continued to slow attrition, taking the full-year 2010 rate down to 6.4 percent from 8 percent in 2009. Total portfolio assets declined 1 percent, including the acquisition of Enbridge Electric Connections. That was down sharply from a 5.9 percent decline rate in 2009. Coupled with rate increases, the result was a 6 percent boost in revenue from the rental business.

The submetering business, meanwhile, enjoyed a 90 percent lift in revenue, thanks to the Enbridge unit acquisition. Overall cash flows rose 12 percent and the payout ratio fell to 62 percent on a 9.2 percent boost in distributable cash flow that more than offset dilution from an equity issue to finance the acquisitions. Interest expense leveled off, as the company was able to refinance a higher debt load at a lower rate. There are no debt maturities until a CAD60 million issue comes due on Apr. 30, 2012. The interest rate of 6.2 percent is above market, which should offer further opportunities to cut costs.

These numbers are very encouraging for the security of EnerCare’s 9 percent-plus dividend in 2011 and beyond. More bullish, however, is the outlook for the coming year, particularly in the submetering division. Operations here have been stymied for nearly two years by Ontario regulators. But with clear rules established now, the company should be able to boost cash flows relatively quickly. That may not deliver a dividend increase anytime soon. But with the Enbridge Electric Connection takeover already cash-flow positive in the first quarter since close, this business looks like a good candidate to produce positive surprises and gains in the stock.

There are still some issues, such as the company’s continuing relationship with Direct Energy and a handful of already installed submeters that are still dormant due to lack of regulatory approval to run them. But more than at any time in recent months, it looks like the company is succeeding in tackling its challenges. I still rate EnerCare a buy up to USD8 for those who don’t already own it.

Newalta Corp’s (TSX: NAL, OTC: NWLTF) headline earnings per share number for the fourth quarter dropped to CAD0.06 from CAD0.09 in the year-earlier quarter. That, however, is a meaningless figure when it comes to measuring the company’s profitability, as the drop was entirely caused by one-time items related to taxes.

The actual business, meanwhile, posted a 19 percent jump in revenue for the fourth quarter and full-year 2010. That pushed up adjusted earnings per share–which exclude such items–to CAD0.20 for the quarter, double 2009 levels. Full-year net, meanwhile, hit CAD0.57, a near quintuple from the CAD0.12 recorded the year before. Adjusted cash flows per share surged 25 percent, and funds from operations soared 37 percent. The result was a dividend payout ratio of just 16.7 percent of funds from operations, after taking out maintenance capital expenditures.

Meanwhile, growth capital expenditures–which expand the business to boost future cash flows–surged 346 percent to more than $21.2 million for the quarter. And the company was able to fund them without issuing equity, while reducing its debt burden by CAD17 million.

Breaking it down, Newalta’s Facilities Division delivered growth of 21 percent in revenue and 31 percent in net margin, as it expanded aggressively in the western Canada natural resource patch. The Onsite Division, meanwhile, added 12 percent more business and lifted margins 37 percent, as it benefitted from increased drilling activity for crude oil. Management was also successful company-wide keeping operating expenses under control, always critical in the cyclical and highly competitive environmental cleanup and recycling business.

Looking ahead, Newalta is budgeting CAD100 million for capital expenditures, continuing the growth trend that began last year. That’s as much a statement on the improving health of its industrial and energy markets as the company’s vastly improved ability to meet demand. And it bodes well for the prospect of future gains in the stock, already up more than six-fold from its March 2009 low.

Still off more than half from its late 2006 high and squarely positioned to take advantage of Canada’s natural resource boom, this one has a lot upside left for patient investors. Buy Newalta Corp up to USD13 if you haven’t yet.

Still to Come

Here are CE Portfolio companies still to report fourth-quarter and full-year 2010 earnings. I’ll highlight them in Flash Alerts later this month, with a full recap in the April issue. Note that we’ll get our first taste of first-quarter 2011 earnings the following month, with a recap in the May issue.

Conservative Holdings

• Atlantic Power Corp–March 21
• Bird Construction Inc–March 11
• CML Healthcare Inc–March 4
• Colabor Group–March 8
• Davis + Henderson Income Corp–March 8
• IBI Group Inc–March 17
• Innergex Renewable Energy Inc–March 23
• Macquarie Power & Infrastructure Corp–March 10
• Northern Property REIT–March 9
• Pembina Pipeline Corp–March 17 (estimate)

Aggressive Holdings

• Ag Growth International–March 14
• Parkland Fuel Corp–March 14
• Perpetual Energy Inc–March 8
• Peyto Exploration & Development–March 9
• PHX Energy Services Inc–March 17 (estimate)
• Provident Energy Ltd–March 9

One final Portfolio note: Earnings numbers and dividend growth are the key factors that can raise or lower buy targets. But until they’re reported for these companies, continue to hold off on purchases of anything trading above buy targets.