Last month I reported roughly as many Canadian Edge Portfolio holdings were up for the year as were down. This month the picture is somewhat more grim.

Only a dozen of the 40 companies and funds in CE Portfolio are actually ahead for the year, including dividends. That includes only one oil and gas producer, Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF). Producers were by and large the worst-hit group due to the drop in energy prices since summer.

Two gas-weighted producers Daylight Energy Ltd (TSX: DAY, OTC: DAYYF) and Perpetual Energy Inc (TSX: PMT, OTC: PMGYF) are actually off 50 percent. Virtually all of the drop has come the past two months, as gas prices have plunged well below USD4 per million British thermal units.

Other stocks have suffered from what I call the “Yellow” disease. As I report in Dividend Watch List, former Portfolio Holding Yellow Media Inc (TSX: YLO, OTC: YLWPF) has now eliminated its dividend as part of a plan to appease increasingly restive lenders.

With its access to capital markets essentially shut off by a plunging stock price and bond yields approaching 20 percent, the company has essentially been subjected to a margin call that’s all but wiped out shareholder value. And with CAD2.3 billion in debt and management still providing no real guidance on the success of its transition from print to Internet directory advertising, prospects for survival are iffy.

My advice to sell in early August was admittedly late, as I waited until management walked away from prior guidance on the print-to-web transition. If that saved anyone the pain of Yellow’s further decline this month, I’m thankful. The real damage from Yellow, however, was fallout: mainly, steep share price declines across the board in dividend paying stocks, particularly those with perceived higher risks.

The conventional wisdom about income investments is they’re interest-rate sensitive. When the benchmark 10-year Treasury note yield rises, they’re supposed to sell off to lower prices. When benchmark rates fall, they’re supposed to rally.

As I’ve pointed out many times to Canadian Edge readers, however, that relationship noticeably turned on its head in mid-2008. Even as benchmark interest rates fell sharply during the crash of 2008, dividend-paying stocks across the board were taking an unprecedented beating. Then, as the economy bottomed and benchmark rates started heading up in early 2009, dividend-paying stocks suddenly were off to the races. Finally, in mid-2011, their rally ran out of steam, even as the benchmark 10-year Treasury note yield plunged to its lowest level ever–well under 2 percent.

The upshot is dividend-paying stocks have been a lot more economically sensitive in recent years than interest-rate sensitive. And the ongoing market action suggests that’s not going to change anytime soon.

Income investments are now being priced according to perceived risk to dividends. The greater the perceived risk the lower prices will go, and the higher yields will rise.

In the first half of 2011 investors were willing to accept more risk with high yielding investments than at any time since late 2007. Then came worries about European sovereign debt woes morphing into a full-scale global credit crunch and recession. Coupled with the demise of Yellow, that’s dramatically altered both the perception of risk and the willingness to take it on.

As a result, prices for dividend-paying stocks across the board have fallen sharply from first-half 2011 levels. And the only stocks to escape the worst of the carnage are from sectors perceived to be the most recession-resistant, such as power and pipeline companies.

As of this writing 16 Canadian Edge Portfolio Holdings–including both Conservative and Aggressive names–yield at least 8 percent. Half of those yield at least 10 percent. That’s a level that clearly prices in dividend cuts, in some cases quite large ones.

The key question though is how much of this pricing reflects genuine risk and how much is simply due to guilt by association. If it’s the latter, we have a stunning buying opportunity to lock in high yields that are in many cases set to grow at robust rates. And US investors’ gains from here will be magnified by a recovery in the Canadian dollar, which will inevitably follow when the “de-risking” trade driving up the US dollar now unwinds.

If, on the other hand, these lower prices/higher yields represent an accurate pricing of risk, we may want to exit some of these positions. That’s because the real losses are yet ahead for any company that truly cracks up as Yellow did.

Dividends Are Key

A 10 percent annualized dividend will cover a 40 percent share price loss only after four years–and that’s only if the company manages to keep paying it.

On the other hand, when a company maintaining its dividend suffers stock market losses, it’s purely because investors perceive greater risk. The losses can and will be swiftly reversed, when that perception becomes less negative.

In other words, maintaining or even growing a dividend may or may not provide any protection from stock market losses in the near term. But it does ensure those losses will be eventually turn into gains, provided investors are patient. Only if companies’ dividends are truly in danger is there real risk of a permanent loss of capital.

Ensuring dividend safety of our Holdings is the key to recovering from the stock market losses of the past several months. We could see further losses as the market sorts out the macro risks, or if another high-profile dividend-paying company should falter. But sooner or later, as long as our companies hold or increase dividends we’re going to be made whole.

There are two reasons companies cut dividends: Inadequate revenue and unsustainable debt loads. Yellow wound up suffering from both maladies. My goal this issue was to see how vulnerable current CE Portfolio stocks are to both risks, assuming credit tightens and the North American economy weakens markedly.

That, by the way, is not my forecast. But like a good insurance policy, a safety rating system should always keep an eye on unexpected events, known in the investment business as “tail risk.”

To that end, I’ve slightly tweaked the CE Safety Rating System. First, rather than assess a company’s payout ratio purely in comparison to its sector peers, I’ve also assessed it in light of visibility for future profits. Having a very low payout ratio based on the past quarter’s numbers is no longer enough to earn two ratings points. Rather, I’ve got to see both a low number and have assurance that the payout ratio will stay in the safe zone for the next 18 to 24 months at least. That’s impossible for companies operating in some businesses.

Second, my tolerance for needed debt refinancing has been cut in half. Mainly, companies’ total maturing bonds, loans and credit lines between now and Dec. 31, 2012, must be less than 10 percent of market capitalization–shares outstanding times share price.

Obviously, I prefer a company with no debt maturities whatsoever between now and the end of 2012. But a company with a large market capitalization has plenty of weapons at its disposal to mitigate debt maturities in the worst possible environment. In contrast, a company with debt maturities greater than market cap faces a potential financial Armageddon should its lenders call in their loans. That unhappy prospect faces several companies identified in this month’s Feature Article.

I’ve combined these new criteria with four holdovers–payout ratio in safe range for sector; debt/capital ratio in safe range for sector; no dividend cuts the past five years; a recession-resistant business–to arrive at a new, tougher Safety Rating System. The total criteria met are added together to arrive at a rating, with “6” the highest and “0” the lowest.

The table “A New Safety Rating System” shows the results. I’ve also adjusted ratings for all companies. Changes are noted in How They Rate and In Brief.

Takeaway No. 1 from this table: Very few companies earn a 6. Those that do are High Yield of the Month Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF), Cineplex Inc (TSX: CGX, OTC: CPXGF), Keyera Corp (TSX: KEY, OTC: KEYUF), Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) and RioCan REIT (TSX: REI-U, OTC: RIOCF).

Investors are well aware of these companies’ strengths. All six are still up double-digits for 2011, even in US dollars terms, despite the roughly 10 percent decline in the Canadian dollar this year. Each of these companies, however, has earned those gains by making itself more valuable. And there are still plenty of gains ahead for anyone buying them now.

All are suitable for even the most conservative investors. “Buy under” prices are as follows: Brookfield Renewable Power (USD25), Canadian Apartment Properties (USD20), Cineplex (USD25), Keyera (USD38), Pembina Pipeline (USD25) and RioCan (USD25).

In contrast, 2011 performance of the 13 companies drawing ratings of 5 is quite a mixed bag. On the plus side is AltaGas Ltd (TSX: ALA, OTC: ATGFF), which misses a 6 only because it cut its payout when it converted to a corporation last year. The only question now is when this company will raise its dividend and return to regular payout growth. AltaGas is a buy under USD26.

On the other side are Ag Growth International Inc (TSX: AFN, OTC: AGGZF) and Just Energy Group Inc (TSX: JE, OTC: JUSTF), which have both been sold off viciously this year. Ag Growth misses a 6 because its business is affected by commodity prices.

Mainly, high grains prices encourage more planting and harvesting, which increase demand for its handling equipment and services, whereas low grains prices would tend to depress the same.

Judging from questions fielded during the company’s teleconference this week, Ag Growth’s drop in share price over the past couple of months appears mostly due to the perception that agricultural spending is set to drop. Management answered that question head on, stating spending trends appeared to remain positive.

The company did guide projected third quarter revenue down to CAD81 million from CAD86 million and warned of some impact on margins as well. That, however, was largely the result of weather-related factors rather than any deterioration of fundamentals. Moreover, the company announced the USD11 million acquisition of a manufacturer of aeration products and filtration systems, demonstrating its financial power and expanding its reach and product line.

The upshot is there is no risk to Ag Growth’s dividend at this time, as has been implied in the drop in its share price. As a result, I fully expect a return to the 50s once the global economic worries that have driven down its share price soften. Until then, however, my new buy target for Ag Growth International is USD40.

Just Energy misses a perfect 6 because of a currently high payout ratio. Ironically, management indicated in a statement this week that the payout ratio for fiscal 2012 (end Mar. 31) would actually be less than the 100 percent it had previously targeted.

The company went on to state that its second-quarter results, to be released Nov. 8, will show that it “remains ahead of the pace necessary to meet the guidance.” Moreover “nothing management sees causes concern that the third and fourth quarter results will not be sufficient to result in the company exceeding its guidance” and “the Just Energy Board has not considered a reduction in the dividend and no discussion of any future reduction is planned.”

That’s about as clear an affirmation as is possible that the dividend–which is currently well in double-digits–will hold up. CEO Ken Hartwick also noted the company’s ability to weather the 2008 recession without a dividend cut as well its conversion to a corporation without a cut.

Of course, Yellow Media management also had soothing words for investors during its period of decline. Just Energy, however, is growing its business, both organically through existing operations and via acquisitions.

More important, the visibility of its future cash flows is pipeline-like, with margins based on long-term contracts that match up exposure to commodity prices. And it has no debt maturities before Dec. 31, 2013, when its CAD350 million credit agreement (CAD63 million drawn) comes up for renewal.

In short, it’s a completely different animal that’s nonetheless been tarred with the same brush as Yellow. The price volatility is unnerving but worth weathering. And Just Energy Group is a buy all the way up to USD16 for new investors.

Other 5-rated companies include Artis REIT (TSX: AX-U, OTC: ARESF) and Northern Property REIT (TSX: NPR-U, OTC: NPRUF). Artis misses a 6 solely because of its heavy exposure to western Canada, which is still working its way out of overbuilding in the last decade. This makes its future payout ratio a bit less predictable. Northern misses only because of its staple share structure, which it may be forced to alter due to a potential change in Canadian tax policy.

Neither of these are significant risks to the bottom line at this time. I fully expect solid profits when third-quarter numbers are released. Both REITs, however, have taken more than 10 percent hits as stocks this fall and are in bargain territory. Artis is a buy under USD15; Northern Property is a buy under USD30.

Atlantic Power Corp (TSX: ATP, NYSE: AT) misses a 6 only because it’s in the process of completing its acquisition of Capital Power LP. The company has attained all needed regulatory approvals in the US and Canada and is now waiting on the results of a shareholder vote, scheduled for Nov. 1. Assuming a “yes” vote as is likely, the deal will close shortly thereafter.

At that point management will have the option of pursuing permanent debt and equity financing for the purchase, or else waiting for better market conditions. The current arrangement gives it considerable flexibility by essentially locking in an interest rate as it works to fund the deal’s CAD625 million price tag. And once the permanent financing is completed, Atlantic Power will earn a 6 again.

The fact that the company is making a major acquisition with credit fears so high likely explains why Atlantic is barely breakeven year-to-date, after being well up earlier. But Atlantic Power is cheap for new money, selling a couple of bucks below my buy-under price of USD16.

Bird Construction Inc (TSX: BDT, OTC: BIRDF) misses a 6 because of a high second-quarter payout ratio. That’s no doubt weighed heavily on its share price, which is off more than 25 percent this year. Ironically, the company’s visibility on future cash flow is far better, following the acquisition of HJ O’Connell in late August. That combination has already paid dividends, namely a CAD100 million contract to remove waste rock from the Mount Wright mine in Quebec, owned and operated by ArcelorMittal Mines Canada.

This type of contract will reduce the company’s current dependence on government work, which is a legacy of the 2008 crash and the slow recovery in the private sector. Meanwhile, the company always operates from surplus with no debt, has never cut its dividend and has a business that’s relatively immune to commodity price swings, evidenced by the way it weathered 2008.

All that indicates the current share price weakness–like the high payout ratio–are temporary and that investors can expect recovery, in addition to dividend growth down the road. Bird Construction remains a buy up to USD12.

As an oil producer, it’s hardly surprising Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) shares have sold off with oil prices. The stock has also declined a bit since I added it to the Portfolio last month. So, too, has 5-rated Vermilion Energy Inc (TSX: VET, OTC: VEMTF).

Both stocks, however, remain head and shoulders above other energy producers in terms of safety, missing a perfect 6 under the Rating System solely because their earnings are exposed to energy price volatility. Both companies held their distributions steady during the 2008 crash, when oil fell from over USD150 to less than USD30 in just a few months. And both were able to convert to corporations without cutting dividends.

In fact they were the only former income trust oil and gas producers to pull off both feats. That’s in large part due to rising production profiles, but also to very conservative financial policies that minimize debt and hold payout ratios to very sustainable levels. It’s possible to conceive of energy prices sinking so low as to threaten these companies’ payouts–but it would be a highly unlikely scenario indeed. Vermilion, for example, derives the vast majority of cash flow from production that’s tied to the price of Brent crude, which has consistently remained above USD100 a barrel in stark contrast to oil quoted in New York.

Both stocks are headed a lot higher when oil prices do rebound. Now is a great time to get in if you haven’t yet: Crescent Point up to USD48, Vermilion up to USD50.

Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) is off more than 20 percent this year. That’s despite increasing its dividend a solid 3.3 percent last month, with the promise of regular annual boosts to come.

No doubt the selloff–which began in mid-summer–is due to worries now percolating among investors that the Canadian banking system is about to get whacked by problems in Europe. Even were that to occur, it wouldn’t affect Davis + Henderson’s steady business much, as its revenues are based on providing a host of under-the-radar but essential services to the industry.

Meanwhile, Davis + Henderson’s financial and payout policies remain ultra-conservative. In fact, they’re to blame for the fact the company doesn’t earn a 6, as management cut the dividend earlier this year as part of its conversion to a corporation. But the current level is very sustainable, and there are no near-term debt maturities. In fact, the nearest one is a credit line inked in June that doesn’t need to be rolled over until April 2016.

In short, there’s not much risk here. And after this year’s slide Davis + Henderson–my favorite financial–is a superb buy up to USD20.

Similarly, Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF) only misses a perfect 6 because it also cut its dividend when it converted to a corporation last year, by combining with its parent. That transaction created a much more powerful company with deep pockets and a massive pipeline of future hydro and wind projects.

Building power plants is a capital-intensive business. But Innergex doesn’t have any debt maturities before a CAD47.6 million term loan comes due on Dec. 13, 2013. Meanwhile, overall debt is very low at 47 percent of capital, and the payout ratio is also well under control, and in fact well below what management has been guiding for since the conversion/merger with the parent.

Like Brookfield Renewable Power, Innergex’ growth model is to identify new hydro and wind projects, lock in contracts with Canadian provincial power authorities for the long haul, arrange financing and only then start building. The result is a cash flow stream that’s quite predictable and on course for dividend growth in coming years. The stock’s weakness this year is a little hard to fathom. But it’s also an opportunity for new investors to buy Innergex Renewable Energy, a very strong company, up to USD10.

Lastly, the ranks of 5-rated picks includes two transportation companies: Student Transportation Inc (TSX: STB, NSDQ: STB) and TransForce Inc (TSX: TFI, OTC: TFIFF). Despite the risk of slower conditions in the trucking and transport industry, TransForce is rated “buy” by all eight analysts who cover it. And it misses a perfect 6 under my System only because it cut its dividend when it converted to a corporation in 2008.

Other than that, the numbers are impeccable. The payout ratio is only 40 percent, leaving plenty of room for more growth, even after the 15 percent hike announced in May. And the next debt maturity is a credit line on which just CAD500,000 of CAD40 million is currently drawn, due Jul. 31, 2013.

That’s a lot of financial flexibility for TransForce, which has consistently and successfully grown its business for as long as I’ve owned it in Canadian Edge. TransForce stock is well off its mid-2011 highs but is strong as ever and a buy all the way up to USD16 for those who don’t already own it.

Student Transportation also rates a 5. I’ll bump it up to a 6 once it takes care of a 5.941 percent note that matures Dec. 14, 2011. That note is a little less than 10 percent of market capitalization. The interest rate is slightly below the 6.25 percent rate fetched in the company’s June convertible note offering. That implies the company will either have to issue equity, short-term debt or else pay a slightly higher interest rate for the rollover–and it likely explains why the company hasn’t made its move yet.

The company does have some flexibility with its credit lines and could put off permanent financing in a worst-case. And once it rolls over the debt, I’ll likely bump it up to a 6.

Meanwhile, the company has announced solid fourth-quarter and full-year fiscal 2011 results (ended Jun. 30). Results are based on a typical school year, reflecting the timing of revenue earned. I reported these in a Sept. 23 Flash Alert.

Highlights include a 19.6 percent jump in full-year cash flow, an 83 percent full-year payout ratio that bested target guidance of 85 percent, and a projected 12 percent boost in revenue from new contracts in fiscal 2012, now underway. And, like pipelines and power companies, these revenues are locked in by long-term contracts, providing utility-like visibility on future revenue and minimizing the potential for surprises.

That’s the kind of stuff I like to see in a Portfolio Holding, and right now it comes with a 10 percent yield attached. Student Transportation is a buy up to USD7 for those who don’t already own it.

More Risk, More Reward

That’s a total of 19 companies that rate at least a 5 or 6 under my toughened Safety Rating System. And despite the volatility some of them have suffered, I feel very confident recommending all of them to even the most conservative investors.

They’re best held in a diversified portfolio. They’re not likely to stumble, but that’s still the best way to ensure against the unexpected–so-called tail risk.

The remaining 17 companies in the Canadian Edge Portfolio don’t stack up quite as well. I have them because they offer something else: higher potential reward if things turn out the way I expect. Diversification is even more important with these, given the greater risks of failure. But I’m still confident enough to rate all but two of them “buys” in this environment.

The two that stand out on that score are both natural gas producers: Daylight Energy Ltd (TSX: DAY, OTC: DAYYF) and Perpetual Energy Inc (TSX: PMT, OTC: PMGYF). The reason is plunging natural gas prices, which have now hit their lowest level since the crash of 2008, barely USD3.50 per million British thermal units. Both rate holds.

That poses a particular strain for Daylight and Perpetual because of relatively high debt loads. Both companies also face near-term debt maturities that have risen sharply relative to market capitalization, as their share prices have fallen. I do expect them to both persevere. But it’s why they earn CE Safety Ratings of just 3 and 1, respectively.

In Daylight’s case, the pending maturity is a credit line of CAD650 million, CAD437 million of which was outstanding as of Jun. 30, 2011. It will have to find some way to roll that over this month. The good news is there’s not much to worry about after that, as the nearest maturity is a CAD75 million bond due Dec. 31, 2012, paying a 10 percent coupon rate that should be easy to roll over economically.

Daylight also appears to have settled its problems with production from earlier in the year, which should bring higher cash flow in the second half of 2011 even with the drop in energy prices. But until there’s more clarity on the loan front, the stock won’t rate any higher.

As for Perpetual, its debt maturities are both in 2012. A CAD75 million note will mature Jun. 30, 2012, while a CAD210 million credit line is up for renewal on May 29, 2012. The good news is only about CAD96.6 million of the credit line is outstanding, reflecting management’s efforts to slash debt over the past year.

The drop in natural gas prices, however, is going to make further debt reduction more difficult to come by. The company’s shift to oil could push liquids to as high as 50 percent of 2012 cash flows, which should provide some stability to cash flow and provide security for lenders. And management has proven itself adept time and again with surviving tough times. But the numbers show Perpetual meets only one criterion–a low current payout ratio–and that’s a clear demonstration of the risk facing investors.

There’s massive upside here if the company’s plans pay off, particularly with the stock shedding half its value this year. But this unloved stock is for pure speculators only, and no one should be averaging down in it or any other pick.

Slightly higher up the food chain is Parkland Fuel Corp (TSX: PKI, OTC: PKIUF). The company misses on a high payout ratio for what’s generally a commodity-driven business. And the dividend cut at conversion to a corporation misses on that score as well.

Where it does make the grade is the fact that debt is fairly low and it has no debt maturities until 2014. On Jun. 29, 2014, a CAD450 million credit tranche will have to rolled over. But the company has drawn on only CAD274.38 million of it. There’s also a CAD98 million bond that’s due Nov. 30, 2014. Other than that there’s only a CAD45 million convertible due Dec. 31, 2015.

Low debt and the high cash flows of the fuel distribution business give management a lot of flexibility. And its current share price and more than 11 percent yield give it no credit whatsoever for that strength. If management can bring down the payout ratio in the second half of 2011, as it has intimated, this stock should recover swiftly and I’ll be raising its Safety Rating. Until then, Parkland Fuel is a strong buy for risk takers all the way up to USD13.

Of the companies rated either 3 or 4, nine of them have at least some commodity-price exposure. That will be a plus when market conditions stabilize. But it does knock a point off their CE Safety Rating and in most cases it’s been a major catalyst for losses this year.

One exception is Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF), which I review in High Yield of the Month. It misses on high payout ratio and the need to refinance an outstanding loan of CAD57.5 million. Neither should be a problem going forward, thanks to the company’s acquisition of a 70 percent interest in Bristol Water of the UK. And I fully expect to boost the Safety Rating of the stock to the 5 area over the next several months.

Colabor Group Inc (TSX: GCL, OTC: COLFF) once drew a higher rating but is currently only a 4, due to erratic earnings and the need to pay off a convertible bond that comes due on Nov. 11, 2011. Happily, only CAD14.3 million of the original CAD50 million is currently outstanding, which should pose no problems. But until the full amount is retired and earnings show more stability, the stock will rate a 4.

EnerCare Inc (TSX: ECI, OTC: CSUWF) draws a 3 rating for three reasons. First, the company cut its dividend in late 2009. That was in response to the Ontario government’s order to suspend sub-metering expansion, while putting all current contracts under review. Since then the provincial authorities have set clear rules and allowed the company to compete again, with the result of very strong results the past two quarters.

The company also misses a point for the level of debt, a legacy of its expansion in submetering that’s only beginning to pay off. And it has CAD60 million in debt coming due Apr. 30, 2012, that will either have to paid off or rolled over.

The 6.2 percent coupon interest rate on this security is well above the 3.62 percent yield-to-maturity on EnerCare’s current three-year bonds. That suggests a real opportunity to dramatically extend the maturity of this CAD60 million issue and/or radically slash interest costs.

Until the issue is rolled over, I won’t be able to raise the company’s CE Rating. But with the stock basically flat this year and still yielding more than 9 percent, now’s a great time to buy EnerCare below my target of USD8.

Extendicare REIT (TSX: EXE-U, OTC: EXETF) now yields more than 12 percent, having shed nearly 30 percent of its value this year. I’m deep underwater with this position at this time. But there’s still very real hope for recovery, as well as limited downside for this company.

Extendicare gets points for a low current payout ratio, the fact that its business isn’t commodity-price sensitive and a generally steady level of overall debt. It loses a point for cutting its dividend in early 2009, a casualty of the recession. A cut in Medicare rates and the potential for more cost cutting by Uncle Sam limits the visibility of future profits. And there’s the matter of CAD140 million in credit lines to roll over by Jun. 23, 2012.

The good news is there’s only CAD19.79 million drawn on these lines, an amount equal to just 3.5 percent of Extendicare’s market capitalization. After that, there’s CAD91.8 million due on a 7.25 percent note due Jun. 30, 2013, and CAD133.9 million of a 5.7 percent convertible bond due Jun. 30, 2014. Neither is a particularly backbreaking proposition.

Of course, the bulk of Extendicare’s debt is at the operating level, i.e. mortgages attached to properties the company owns. The company has been in the process of refinancing these with low-cost mortgages insured by the US Dept of Housing and Urban Development. At last count the company had submitted USD565 million worth of applications and had received commitments for roughly half. The average interest rate of 4.5 percent for 32 years contrasts sharply with the 6.7 percent rate on the debt replaced.

That’s a substantial cost savings that will go a long way toward offsetting the impact of reduced Medicare payments announced this summer. But until the deals are done, there will be uncertainty.

The biggest challenge with this company, of course, is meeting management’s targets for cost cutting to offset the Medicare cuts–and being able to hold the dividend. The lofty yield clearly shows investor skepticism that they can. As I’ve pointed out in prior issues of CE, however, management appears to have anticipated this outcome and continues to affirm the safety of the dividend.

Moreover, unlike Yellow Media, this is a business built on ownership of real assets, mainly 258 owned and operated health care centers throughout North America. The boost in the US dollar should help third quarter results a bit. Extendicare REIT is still a buy up to USD10.

Finally, IBI Group Inc (TSX: IBG, OTC: IBIBF) is off more than 20 percent this year and yields nearly 10 percent after an early October plunge. The latest down-move appears to have little to do with anything, other than perhaps an increase in short volume.

The latest news on the company was hardly negative: The Sept. 28 close of the purchase of an architectural firm focused on educational facilities in Portland, Oregon. The deal expands IBI’s presence in this market and immediately adds contracts and cash flow.

The company draws points for payout ratio, future earnings visibility, no near-term debt maturities–the next one isn’t until Dec. 31, 2014–and a lack of commodity-price exposure. It loses points for cutting its dividend in January 2011 when it converted from income trust to corporation, as well as a relatively high level of debt for a company without significant fixed assets.

Barring a big cut in debt–much of which is the legacy of recent acquisitions–IBI isn’t likely to earn an upgrade to its CE Safety Rating anytime soon. It’s a lot more likely, however, to hold its dividend in the face of investor skepticism and sharply recover recent losses.

All 11 Bay Street analysts who cover the company, for example, have “buy” ratings on the stock–with two upgrading immediately following the release of robust second-quarter results.

Risks include a drying up of new orders in the public sector before private-sector design business really bounces back. The company’s broad global diversification, however, mitigates its exposure to any one country. So does its expertise in this niche business and the fact that design work is easier to approve than actual construction. In short, IBI looks mispriced by an over-estimation of risks. Buy IBI Group up to USD15.

Of the remaining resource-related companies, ARC Resources Ltd (TSX: ARX, OTC: AETUF), Enerplus Corp (TSX: ERF, NYSE: ERF), Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE) and Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) all rate 4s. Meanwhile, Acadian Timber Corp (TSX: AND, OTC: ACAZF), Newalta Corp (TSX: NAL, OTC: NWLTF), PHX Energy Services Corp (TSX: PHX, OTC: PHXHF) and Provident Energy Ltd (TSX: PVE, NYSE: PVX) all rate 3.

The primary difference is payout ratios. ARC, Enerplus, Penn West and Peyto have exceptionally low ones. Meanwhile, Acadian, PHX and Provident have generally high ones relative to other stocks in their sectors.

Newalta is the exception among the 3s, with a payout ratio of just 17. But it also has something ARC, Enerplus and Penn West do not: substantial near-term debt rollover requirements. A CAD115 million note doesn’t mature until Nov. 30, 2012. That should provide the company plenty of time to make a move, and it should be able to fetch an interest rate that’s in line with current rates. Failing that, the company has a CAD200 million credit facility it’s only CAD57 million drawn on that could make up the difference while it’s waiting to permanently refinance.

The point is this refinancing shouldn’t be a big deal for Newalta. But it does rob it of a Rating System point, as does the dividend cut made in early 2009 when the company converted from income trust to corporation. Finally, the business is definitely commodity-price driven, though management has proven time and again its ability to weather hard times while continuing to grow its business. The yield isn’t high, but Newalta is bargain-priced and a buy up to my target of USD15.

A lack of near-term debt maturities is a big plus for Acadian Timber, though it misses points for commodity-price exposure, a dividend cut made back in late 2009 as the company converted from trust to corporation and a lofty payout ratio. Management has maintained it has set the dividend conservatively and points to enviable reserves and a burgeoning business with Asia to back its claims. Nonetheless, I’ll be very interested in what kind of numbers the company pulls down in the third quarter, now slated for release Oct. 28.

PHX is an energy services company, with a primary business of owning and operating drilling rigs. The company is therefore leveraged to energy prices in two ways, as prices determine activity and therefore utilization of drilling equipment as well as the rates companies like PHX can charge. That exposure, however, is offset by low debt, zero near-term debt maturities and the company’s reliance on contracts for its state-of-the-art equipment, which is used heavily in directional drilling.

Not surprisingly, investors have beaten up on PHX since energy prices began falling this summer, and the stock is now down more than 35 percent year to date. That drop will reverse with a vengeance when energy prices recover. Meanwhile, many are basically ignoring the fact that much of PHX’ business is now with companies who price oil on Brent crude, which is still over USD100 a barrel.

I expect solid third-quarter results to show continued global growth at this company. Buy PHX Energy Services–my favorite Canadian drilling company–up to USD14 if you haven’t yet.

Provident Energy’s still relatively low rating is something of a hangover from the days when it was also an exploration company and its restructuring as primarily a natural gas liquids (NGLs) infrastructure company. That process is going swimmingly, with Provident targeting CAD280 million in growth capital the next two years, and CAD100 million to CAD125 million a year beyond 2013.

Already in October the company has announced several major strategic moves that should push up future cash flows. These include the inking of a long-term storage deal at its Redwater Facility in Alberta based on fee-for-service, part of 2.5 million barrels of capacity signed on the past several weeks. The company also completed the acquisition of a Saskatchewan-based oilfield hauling company serving Bakken-area crude producers and enhancing its NGLs logistics business.

This week management boosted its 2011 cash flow forecast based on these moves, pushing expected cash flows to CAD245 million to CAD285 million, up from a prior range of CAD210 million to CD250 million. Management has been coy to date about dividend growth past mid-decade, in part due to concern about taxability. These results and the increase in capital spending bring the day a lot closer, however, when a return to dividend growth can become a reality.

The company misses Safety Rating points for a high payout ratio, three dividend cuts made over the past five years and the fact that 70 percent of its business is at least somewhat sensitive to commodity prices. Growth of fee-generating business and what should be steadily declining payout ratio promise an upgrade.

Like most energy infrastructure companies, Provident has avoided the worst of the past few months’ selloff and is up about 11 percent year to date, including dividends. But with a solid yield and strong prospects, Provident Energy is still a buy for those who don’t already own it up to USD9.

Acadian and Chemtrade Logistics Income Fund (TSX: CHE, OTC: CGIFF) both operate in commodity price-sensitive businesses. Both have cut their dividends in the past five years. Acadian meanwhile, has a high payout ratio, while Chemtrade has a sizeable credit tranche to roll over between now and Feb. 28, 2012.

The good news is Chemtrade has only CAD9.52 million drawn on the facility, while Acadian’s second-quarter payout ratio is the result of seasonal weakness. As a result, neither should be a problem for these companies with a few months.

Both stocks, however, have fallen since the summer, largely on the perception that profits would take a major hit were the global economy to slide into recession. Management of both companies maintains it has set payout policy to absorb even the worst blows. Chemtrade actually proved it by holding its CAD0.10 per unit monthly distribution throughout 2008 and 2009.

That track record may be holding down losses now, at least relative to the shellacking the stock took in the second half of 2008. But the stock is still likely to lag as long as worries about the global economy are so pronounced. That’s also true of Acadian, despite the support of Brookfield Asset Management (TSX: BAM/A, NYSE: BAM). In my view, the risks of both stocks are well reflected in current prices. But these are no pipeline companies–know and watch the risks. Acadian Timber is a buy up to USD13, while Chemtrade Logistics is a buy up to USD15.50.

As for ARC, Enerplus, Penn West and Peyto, they remain the core of any Canada-focused portfolio of dividend-paying energy producers. All have rising production profiles, exceptionally strong finances and generally low debt. ARC and Enerplus converted to corporations without cutting dividends.

All of these companies were forced to cut dividends during the energy price volatility of 2008-09. The primary reason, however, was exposure to natural gas prices, which have been in a steep decline since late 2005, interrupted only briefly by the spike in oil prices in early 2008. ARC and Peyto have been able to offset much of that decline in recent quarters with production gains that have driven down operating costs. But they as well as the others will remain challenged by lower gas prices, which largely preclude the potential for dividend increases.

That being said, all four appear to be in much better shape to weather energy price downward volatility this time around than they were in 2008. That’s in large part because of low debt and a lack of near-term debt maturities. Only Peyto has a significant amount of the latter, mainly CAD455 million of a CAD625 million credit line that matures Apr. 29, 2012.

The company’s banks, however, were its staunch defenders during the crisis of 2008. And its assets and laser-like focus on debt are also endearing to lenders. Peyto is far and away the best performer of all the energy producers in How They Rate. In fact, it’s the only stock with a significant positive total return (7.4 percent) year to date in US dollar terms in that sector. But Peyto Exploration & Development is still below my target and rates a buy up to USD22.

ARC shares have been all over the map the past few weeks. That’s a stark contrast to its steady operations and CE Safety Rating, which fails to get a 6 only because of commodity-price exposure and a series of five energy price-related dividend cuts from late-2008 through early 2010. Today’s payout ratio is rock bottom and, despite the drop in energy prices, profits are likely to rise again on production growth. ARC Resources is a gem and a buy up to USD26.

Enerplus also misses a 6 solely because of commodity-price exposure and dividend cuts made in late 2008 and early 2009. But it, too, has a very low payout ratio, a nearly fanatical devotion to holding down debt and a clear path to production gains, with a focus on light oil from the Bakken region.

The company is likely to see lower profit when it releases third-quarter earnings on Nov. 10. But the dividend looks solid, barring a much steeper drop in energy prices. Buy Enerplus up to USD33 if you haven’t yet.

Finally, Penn West has rightly been accused of not listening to investors. However, the stock’s drop to less than USD15–half the estimated value of its oil-focused reserves–has taken it down to what even the most stubborn skeptic would have to admit is deep value.

Throw in the fact that this company has dramatically slashed debt and has one of the most conservative payout ratios in the business and there’s a real case for buying this stock–which would actually be a value all the way up to my longstanding buy-under price of USD30. That’s evidently what many on Bay Street things, as the analyst count remains 10 “buys” and only three “holds” with no “sells.”

The only debt maturity between now and May 2014 is CAD223 million in notes due Dec. 31, 2011, an amount equal to just 3 percent of current depressed market capitalization. Buy Penn West Petroleum under USD30 if you haven’t yet.

A Look Back, And Ahead

Every quarter I provide an exhaustive review of earnings for all CE Portfolio companies. The numbers I discuss provide the basis for my recommendations.

Below I present two lists. The first highlights where to find the most recent earnings analysis for each company, useful backup to the discussion above. The second looks at when to expect the next batch of earnings numbers.

As always, I’ll be providing analysis in regular issues of Canadian Edge as well as via Flash Alerts for those companies reporting in between issues.

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Jul. 29 Flash Alert
• Artis REIT (TSX: AX-U, OTC: ARESF)–Aug. 12 Flash Alert
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Aug. 12 Flash Alert
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Aug. 12 Flash Alert
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPUF)–August CE Portfolio Update
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Aug. 12 Flash Alert
• Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–Aug. 15 Flash Alert
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Aug. 12 Flash Alert
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–Jul. 29 Flash Alert
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Aug. 10 Flash Alert
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–Aug. 10 Flash Alert, Aug. 15 Flash Alert
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–Aug. 15 Flash Alert
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Aug. 15 Flash Alert
• Just Energy Group Inc (TSX: JE, OTC: JUSTF)–Aug. 12 Flash Alert
• Keyera Corp (TSX: KEY, OTC: KEYUF)–August CE Portfolio Update
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Aug. 10 Flash Alert
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–August CE Portfolio Update
• Provident Energy Ltd (TSX: PVE, NYSE: PVX)–Aug. 12 Flash Alert
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–August CE Portfolio Update
• TransForce Inc (TSX: TFI, OTC: TFIFF)–August CE Portfolio Update

Second-Quarter Results–Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–Jul. 29 Flash Alert
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Aug. 15 Flash Alert
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–August CE Feature
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–August CE Portfolio Update
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)– August CE Feature
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Aug. 8 Flash Alert
• Enerplus Corp (TSX: ERF, NYSE: ERF)–August CE Portfolio Update
• Newalta Corp (TSX: NAL, OTC: NWLTF)–August CE Portfolio Update
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–August CE Portfolio Update
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–Aug. 10 Flash Alert
• Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–Aug. 10 Flash Alert
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Aug. 12 Flash Alert
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–August CE Portfolio Update
• Student Transportation Inc (TSX: STB, OTC: STUXF)–Sept. 23 Flash Alert
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–August CE Portfolio Update

Third-Quarter Announcements–Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Oct. 28 (estimate)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 9 (estimate)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 11 (confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Nov. 8 (estimate)
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPUF)–Nov. 9 (estimate)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Nov. 8 (estimate)
• Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–Nov. 14 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Nov. 11 (estimate)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–Oct. 6 (estimate)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Nov. 2 (estimate)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–Nov. 4 (estimate)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–Nov. 10 (estimate)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Nov. 8 (estimate)
• Just Energy Group Inc (TSX: JE, OTC: JUSTF)–Nov. 9 (estimate)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Nov. 1 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Nov. 10 (estimate)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–Nov. 3 (estimate)
• Provident Energy Ltd (TSX: PVE, NYSE: PVX)–Nov. 10 (estimate)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Nov. 7 (confirmed)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–Nov. 1 (confirmed)

Third-Quarter Announcements–Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–Oct. 27 (confirmed)
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Nov. 10 (estimate)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Nov. 1 (estimate)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 10 (estimate)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–Nov. 3 (estimate)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Nov. 8 (estimate)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–Nov. 10 (confirmed)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Nov. 4 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Nov. 11 (estimate)
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–Nov. 3 (estimate)
• Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–Nov. 8 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Nov. 9 (estimate)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–Nov. 3 (estimate)
• Student Transportation Inc (TSX: STB, OTC: STUXF)–Nov. 11 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–Nov. 4 (estimate)