Dividend Watch List

Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF) has officially declared its first post-conversion dividend. The new rate is slightly higher than the CAD0.35 per quarter initially announced as guidance. But the first quarterly payment of CAD0.40 on May 19 will still be 46.7 percent below the CAD3 annual rate Canfor paid as a trust.

Despite the steep cut, there’s been relatively little movement in Canfor shares this week. That could well be because the market was fully expecting and pricing in such a reduction as it ran the stock to new highs this year. On the other hand, several popular quote services are apparently still showing the old rate, and may continue to until the payment is actually made on May 19. Consequently, I’m not wholly convinced the announcement–which was made along with the first-quarter earnings release after the close on May 2–has been fully absorbed by the market.

On the plus side, Canfor’s results were solid. Distributable cash flow came in at CAD0.77 a share, which covered the declared CAD0.40 per share dividend by a strong 1.925-to-1 margin. That’s good enough for me to remove Canfor Pulp Products from the Dividend Watch List.

Global softwood demand was, in management’s words, “very strong” in the first quarter, led by China. And inventories remain tight heading into the second quarter, allowing the company to push through price increases in the US and Europe as well as the Middle Kingdom. The company also reported a 6 percent decline in per unit manufacturing costs thanks to lower fiber costs and higher volumes produced, though that was largely offset by a 4 percent drop in shipments of pulp and paper products.

Cash flow per partnership unit was up 6.8 percent sequentially from the fourth quarter of 2010 and 36.2 percent from the year-earlier period. And the company benefitted from a more favorable sales mix, with more high-margin products sold. Cash flow margin rose to 31 percent of sales, up from 28 percent sequentially and 26 percent a year ago.

Although those numbers definitely support the dividend now, Canfor’s margins and cash flows remain vulnerable to changing prices of fiber–which depend on the health of the timber industry–as well as demand for pulp. Both are susceptible to changes in economic growth. Also, the company pays its bills in Canadian dollars, making costs higher to pass along when the loonie is rising.

The upshot: No one should mistake Canfor Pulp Products for a conservative income stock. Rather, it’s an aggressive bet on a solid company operating in a volatile industry where cash flow and dividends can change rapidly from quarter to quarter. No one should forget that the company paid out only a penny per share a month as recently as November 2009, all it could do given horrific market conditions.

Throw in the fact that US investors’ ability to own this stock is still in question and there’s little appeal in my view. The shares may avoid a spill as investors become used to the lower dividend rate. But my advice is still to sell while Canfor Pulp Products stock is within a stone’s throw of an all-time high.

Canfor’s declaration of a quarterly, post-conversion division leaves Conservative Holding Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) as the last company in How They Rate to still show up in quote services with its pre-conversion dividend. That’s despite announcing a new rate of CAD0.30 more than a year ago.

The company followed through on its prior commitment to make two payments during the calendar first quarter of 2011: the CAD0.1533 per share paid out on Jan. 31–the last payment declared as an income trust–and an additional “special” dividend of CAD0.15 per share paid Mar. 31. For those who hold Davis + Henderson in an IRA, the second payment isn’t subject to Canadian withholding tax.

The actual first quarterly payment is now expected to be declared on May 18, with an ex-dividend date of May 27. Given the company’s past history paying dividends about a month after the ex-date, the first payment date could be in late June. Quote services, however, should pick up the new rate when it’s declared later this month.

Until they do Davis + Henderson will show a dividend yield that’s roughly a third higher than what it really is. That includes How They Rate. Don’t be fooled. Davis + Henderson yields 6.3 percent, not the 9.7 percent even Bloomberg now posts.

On the bright side, the company continues to execute its strategy of acquiring complementary businesses that enhance its ability to provide Internet-based services to its big Canadian banking customers. The purchase of Mortgagebot closed in mid-April adds the leading provider of web-based mortgage point-of-sale solutions to Davis + Henderson’s stable, at a price that should immediately add to earnings.

We won’t see actual earnings until May 10, which could be when we finally see a post-conversion dividend actually declared as well. But the company remains a premier dividend-paying financial with considerable room to grow earnings and dividends in coming years. That makes Davis + Henderson a buy up to USD20 for those who don’t already own it.

The Watch List’s primary focus is on companies with dividend-threatening challenges at their core businesses. The List is likely to change as first-quarter 2011 earnings are released later this month. Note that not all are sells. If the price is right, even the riskiest company can be a buy for intrepid investors. Here are the current companies to Watch.

• Brompton Stable Income Fund (TSX: VIP-U, OTC: BVPIF)–Hold
• Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF)–Hold
• CML Healthcare Inc (TSX: CLC, OTC: CMHIF)–SELL
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–Hold
• FP Newspapers Inc (TSX: FP, OTC: FPNUF)–Hold
• InterRent REIT (TSX: IIP-U, OTC: IIPZF)–SELL
• Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–Buy @ 5
• Yellow Media Inc (TSX: YLO, OTC: YLWPF)–Hold

Brompton Stable Income Fund (TSX: VIP-U, OTC: BVPIF) makes the list primarily because it’s a closed-end mutual fund holding Canadian investments that has yet to adjust its distribution to reflect trust conversions, despite an historically heavy focus on the group. It’s otherwise a solid, well-managed outfit.

Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF) is currently paying taxes as a specialized income flow-through entity (SIFT), and management has thus far been adamant it can maintain its current dividend rate. A payout ratio over 100 percent, however, indicates some risk. Earnings are due out on May 19, which should provide some clues about sustainability.

CML Healthcare Inc (TSX: CLC, OTC: CMHIF) still shows up fine on the most recent numbers we have, and the payout ratio isn’t extreme at 94 percent. But the abrupt firing of the CEO and COO raises doubts the US operations are showing any improvement, which is key to maintaining the dividend this year.

Colabor Group Inc (TSX: GCL, OTC: COLFF) was forced to eat a 30 percent jump in fuel costs to avoid losing market share in the intensely competitive food services industry. It’s still a consolidator, but the payout ratio moved over 200 percent in the first quarter, so there’s risk to be mindful of as well.

FP Newspapers Inc (TSX: FP, OTC: FPNUF) tapped into a new revenue stream last month by winning a contract to print another paper at its facilities. The payout ratio as of last quarter was under control, but given the evaporation of print media in recent years I always watch this one carefully.

Interrent REIT (TSX: IIP-U, OTC: IIPZF) did show some improvement in fourth-quarter results. But it’s still paying a distribution from negative distributable cash flow, which is frankly untenable. Either results improve or what remains of the dividend is gone.

Perpetual Energy Inc (TSX: PMT, OTC: PMGYF) is a well run company that for the past several years has dealt with some of the worst industry conditions imaginable, namely a prolonged drop in the price of its sole product natural gas. The company is coping and has tremendous upside. But no one should mistake it for a secure income stock and another cut is possible if gas prices collapse again.

Yellow Media Inc (TSX: YLO, OTC: YLWPF) management steadfastly maintains the company’s dividend is sustainable and that the company is meeting its operating targets. But its stock is basically a speculation that management is right and almost every analyst who follows it is wrong.

I’m still willing to let my bet ride after the announcement of first quarter results, but only as an aggressive speculation and with the understanding I will sell if management fails to meet guidance.

Bay Street Beat

Six Canadian Edge Portfolio Holdings had reported first-quarter 2011 earnings as of close of business Thursday. There are among this group a couple disappointments from a long-term wealth-building perspective, issues and decisions that are addressed in greater detail in Portfolio Update.

Here we’re tracking how analysts on Bay Street are reacting to company-level developments.

Acadian Timber Corp (TSX: ADN, OTC: ACAZF) has soared well past the average analyst target price, which is CAD10.85. According to the system Bloomberg employs to smooth variations in Bay Street advice terminology, there are no buy ratings on the stock right now. Four analysts rate it a hold, while one labels it “underperform,” which translates to “sell.” The man from Credit Suisse has a CAD10 target for the stock; at Thursday’s close of CAD11.70 Acadian Timber is 17 percent above that level. The highest target is CAD11.25, set by Salman Partners, which rates the stock a hold.

All five have maintained their posture since Acadian released first-quarter earnings.

Four of the six houses that cover AltaGas Ltd (TSX: ALA, OTC: ATGFF) have reiterated advice since the April issue of Canadian Edge was published, leaving the natural gas producer/infrastructure operator with a three-two-one buy-hold-sell line. None, however, have had time to react to the company’s Thursday morning earnings release.

In the last couple days, however, and ahead of first-quarter numbers, Clarus Securities maintained its buy rating on the stock as well as a CAD27.75 price target. The handful of analysts who’ve taken up the matter in recent weeks have pulled their targets up along with the stock’s actual performance, but we’ll hold off for surer sign of dividend growth before boosting the CE buy target, which remains USD24.

Colabor Group Inc (TSX: GCL, OTC: COLFF) disappointed CE, its subscribers and Bay Street with its first-quarter report. Two analysts downgraded the stock to “hold,” the word both use in-house and so not requiring Bloomberg translation. Industrial Alliance Securities cut its target from CAD15 to CAD12.50, while Laurentian Bank Securities trimmed from CAD13.50 to a target of CAD11.50.

Colabor struggled with rising costs during the first quarter, and its explanation left plenty of room for caution for investors going forward. This is now very much a trust-but-verify situation, which is why it’s now a hold in CE. Management is sticking to its 2011 guidance, and the company continues to expand its reach and its sales. The big key now, obviously, is the second-quarter response still-extant cost pressures.

Twelve of the 15 Bay Streeters covering Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE) have proffered updated advice since the April edition of Canadian Edge, six of them in the hours following the company’s Thursday morning, May 5, first-quarter earnings release. Four restated their buy advice (without raising target prices), while two stuck to their hold ratings.

Penn West’s share price has come down well within range of theirs and the CE target price, which is USD30, in recent days, along with just about everything else levered to the price of crude. But the energy explorer reported a tripling in first-quarter profit, and an influx of capital from Asian investors–notably China Investment Corp (CIC), the Mainland’s highest-profile sovereign wealth fund and its CAD817 million–has energized exploitation of assets that would otherwise have been left dormant.

Oil is a volatile commodity, perhaps never more so than right now. That’s the main reason why Penn West is an Aggressive Holding. The company also wrestled with an asset rationalization process that overlapped with its transition from income trust to corporation. And that process, too, was fraught, as management held out to the last before revealing its post-2011 intentions. But that process is complete. And the CIC investment is a serious difference-maker. Inexplicably, the stock continues to trade below the value of its assets in the ground. The recent commodity correction has it yielding nearly 5 percent, and it remains a buy up to USD30.

“Outperform.” “Outperform.” “Top pick.” “Buy.” “Buy.” “Outperform.” That’s how the six Bay Streeters covering TransForce Inc (TSX: TFI, OTC: TFIFF) review the stock. It translates, according to Bloomberg, in a perfect six buy ratings.

TransForce earned one post-earnings upgrade and corresponding 20 percent price target increase, by Cormark Securities to “market perform,” with a CAD15 target, to “outperform” and a CAD18 target.

BMO Capital Markets boosted its buy target, from CAD17 to CAD18, while RBC Capital Markets had made the same move in the last days of April, before it saw numbers. Desjardins Securities, where TransForce is a “top pick,” has a CAD20 forecast on the stock, and has since mid-February.

TD Newcrest, after it digested first-quarter numbers, pushed its target to CAD20 from CAD18. National Bank Financial, which only picked up coverage of the stock in mid-April, maintained its “outperform”/CAD17 rating.

TransForce closed at CAD14.81 on Thursday, May 5, so Bay Street sees a lot of potential capital upside, 14.8 percent from here over the next 12 months assuming the worst of the six cases, 24.9 percent based on the consensus target of CAD18.50. That’s attractive. But we still wouldn’t pay more than USD14 for the stock, which currently yields 2.7 percent but is methodically expanding its footprint on the North American logistics market.

Yellow Media Inc (TSX: YLO, OTC: YLWPF), discussed above and extensively elsewhere, has a symmetrical one-10-one buy-hold-sell line on Bay Street, which moved only slightly but encouragingly along with its May 5 earnings announcement. Three shops maintained their hold ratings, while one stuck with a buy. Another analyst, however, Canaccord Genuity Corp, was moved to upgrade the stock to a hold just two days after reiterating a sell call he first made when initiating coverage Apr. 11.

Get the real story in Yellow Media in this month’s Portfolio Update.

Tips on DRIPs

In January 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.

We’ll continue to track Atlantic Power and any other Portfolio Holdings that indicate they’re considering or announce that they will sponsor DRIPs open to US investors.