From the health of its banking system to the fiscal balance of its government, Canada has consistently been one of the world’s few economic bright spots since the first issue of Canadian Edge in July 2004. And comparisons are particularly telling when it comes to the US.

Last year fear of global collapse sent investors fleeing for the only market large enough to hold them: US Treasuries. This set off what amounted to the mother of all rallies for Uncle Sam’s debt and the US dollar and a selling wave for virtually anything else.

Canada, too, was caught up in the melee. From early summer to early October the loonie retreated from well over parity with the US dollar to somewhat less. Canada’s stock market took it even worse, particularly on the energy side.

Since October 2011, however, the long trend has returned. The loonie has moved back to parity with the dollar and beyond, and Canadian stocks are rising once again. Impressively, that’s despite what’s emerged as a somewhat jagged global pricing environment for commodities, as investors have struggled with questions about Asian demand and war in the Middle East–even as surging production levels have taken natural gas prices to their lowest level since the 1990s.

The US stock market has kept pace with Canada’s so far this year. But problems remain, ranging from a soft banking system and deflationary housing market to uncertainty about political gridlock, regulation and taxes. Unemployment among the educated is near its lowest levels ever. But for those with a high school degree or less it’s rarely been higher. And the Federal Reserve’s continuing easy money policy continues to raise alarm bells for the long-term stability of the US dollar.

With that backdrop, it seems reasonable to assume that Canadian companies are avoiding going south like the plague, or else are taking steps to limit their US exposure. And to be sure, some are.

CML Healthcare Inc (TSX: CLC, OTC: CMHIF), for example, is now completely out of the US, after divesting all of its medical imaging operations last year. So is Royal Bank of Canada (TSX: RY, NYSE: RY), which made a disastrous foray into the wrong US banks following the financial crisis.

Many more Canadian companies, however, are coming south in a big way. By doing so they’re increasing exposure to US economic challenges, regulation and the often volatile US dollar-Canadian dollar exchange rate.

But they’re finding those concerns far outweighed by the potential payoff of grabbing valuable assets and establishing secure franchises in the best parts of a much larger market. And the price is right, thanks to the relentless strength of the Canadian dollar, which is a third more valuable now than in early 2009.

In the June 2011 Feature Article, Canada Heads South, I highlighted this emerging trend, along with a handful of companies I deemed to be likely winners. Since then, their stocks have been as volatile as anything else. But for the first time fourth-quarter results showed a clear benefit from their past few years’ investment in the US.

That’s a trend I fully expect to continue in 2012 and beyond. For one thing, initial expansion and acquisition costs for many are now in the past, and cash is starting to flow. Other companies have managed to gain needed scale, with the result of rising margins.

Equally important, the US economy is unevenly but gradually picking itself up. Growth, as measured by gross domestic product (GDP), has been on the plus side since mid-2009 and has accelerated in recent quarters. Industrial activity, long in decline on these shores, has suddenly revved up again.

A good part of the recovery is in the old industries like steel and automobiles. But the unlocking of vast reserves of natural gas liquids (NGL) is creating new ones as well where none previously existed. Plentiful ethane, for example, has made it cheaper to produce plastics in parts of the US and Canada than in Saudi Arabia.

Much of this is a long way from showing up in earnings of even the most far-sighted Canadian investors. But the trend is clear: Canadian companies that have executed well-reasoned strategies for US expansion in recent years are looking at a major boost to earnings, and by extension dividend growth.

Moreover, in the current atmosphere of doom and gloom, they’re getting little or no credit from investors for their moves. And those low and easy-to-beat expectations mean solid stock price gains as well.

To be sure, there are risks. As much as the Bank of Canada and the US Federal Reserve try to manage exchange rate swings, global economic events unfold quickly. To the extent companies are caught out–i.e., revenue and cash flow are exposed to a drop in the US dollar–their earnings will suffer.

Of course expenses at US operations are also valued in US dollars, and these diminish, too, for Canadian companies when the US dollar drops. Many companies have further reduced exposure to currency swings by matching US dollar-denominated debt to their US operations. And others still religiously employ other hedging techniques to further factor out the currency.

The real saving grace, of course, is the innate conservatism of most Canadian companies–and all of those in the Canadian Edge Portfolio–when it comes to making any investment. They’re not going to be sunk by a drop in the US dollar, no matter how severe.

Moreover, based on what happened last year, it’s reasonable to assume the US dollar would be a beneficiary of any new global financial blow-up. That would actually lift the US earnings of Canadian companies.

Below I take another look at Canada’s southern exposure and the companies that have locked in what should be robust revenue streams for years to come. I also look at some not-so-successful stories and how to avoid others like them in the future.

As I wrote 10 months ago, Canadian companies aren’t guaranteed success or failure investing in the US.

Rather, the key is how well they execute their expansion plans, how conservatively they finance them and how well they navigate the inevitable, unforeseeable challenges.

Those that do this well are set to prosper this year and well beyond. Those that don’t face the kind of havoc that destroyed Artic Glacier Income Fund (TSX: AG-U, OTC: AGUNF), the ice distributor that was ultimately crushed into bankruptcy by overly zealous government investigators, litigious customers, rising freight costs and too much leverage.

Picking out winners from the losers is just the same as it is for Canadian companies staying at home. Each company sinks or swims on its own merits. Note that both High Yield of the Month picks–AltaGas Ltd (TSX: ALA, OTC: ATGFF) and PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–have large and growing investments in the US. That’s a huge part of their appeal and ability to outperform in coming years.

Heading South

Earlier this year Conservative Holding Just Energy Group Inc (TSX: JE, NYSE: JE) listed its shares on the New York Stock Exchange (NYSE). That followed actions of other former income trusts like Student Transportation Inc (TSX: STB, NSDQ: STB), who followed their investments in the US with an easy-to-access listing here to get investors’ attention.

Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF) plans its own NYSE listing later in 2012. And Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) will do the same after it completes its merger with Provident Energy Ltd (TSX: PVE, NYSE: PVX).

Since Canadian Edge’s founding issue in July 2004, we’ve never been deterred from buying a stock just because it lacked an NYSE or Nasdaq (NSDQ) listing. In fact many of the best bargains in Canada are still those US investors can only buy either directly on the Toronto Stock Exchange (TSX) or by buying those TSX-listed shares over the counter (OTC) in the US.

NYSE or Nasdaq listings do open up these stocks to the less intrepid, who still make up the vast majority of US investors. Over time this should mean higher valuations for the companies who list and therefore a lower cost of capital with which to expand earnings and dividends. And I fully expect to see more listings going forward.

Note that whether you buy a Canadian stock in Toronto or New York, the underlying company is still priced in Canadian dollars and pays you dividends in Canadian dollars. If you’re a US investor your dividends are typically translated into US dollars when they hit your account, again no matter where you buy, but not before you get the full benefit of an appreciating loonie.

Some Canadian companies, of course, have long enjoyed favorable access to US capital by virtue of NYSE listings. One of these is TransCanada Corp (TSX: TRP, NYSE: TRP), the company on the verge of making one of the largest investments ever in the US–a CAD7.6 billion extension of its Keystone Pipeline System.

Keystone XL would dramatically increase the flow of Canadian tar sands output to US Gulf Coast refineries. That’s made it immediately controversial, with the environmental lobby in the US claiming the pipeline would encourage more tar sands development–thus increasing global warming from carbon dioxide (CO₂) emissions, as well as emissions of scores of other pollutants.

The battle has pitted two key constituencies of President Obama against each other: environmental advocates, who see a focal point for their long war on oil, and labor unions, who see the opportunity for jobs. As a result the administration has basically delayed making a decision on the overall project–which needs approval at the highest levels of government because it crosses national boundaries–until after the November election.

That, however, hasn’t stopped TransCanada moving ahead on another segment of Keystone XL, an expansion of capacity from the currently bottlenecked energy hub at Cushing, Oklahoma, to the Gulf Coast refineries.

That’s a CAD2.3 billion chunk of the overall expansion project, which the company expects to get up and running by mid- to late 2013.

Like all energy infrastructure companies TransCanada at its core is an invest-to-grow story. Every time it finances, contracts out and finally builds a pipeline, for example, the cash flow boosts profits, which triggers dividend growth and, eventually, a higher share price.

I’ve said many times that we’ll know there’s a top in the North American energy infrastructure market when companies start building in anticipation of higher demand rather than pre-contracting before starting to work. That definitely hasn’t happened yet for this industry. Until it does we can look forward to companies making more investment that flows right on through to earnings.

The only drawback of buying pipeline companies now is price. This was by far the top performing group in the Canadian Edge Portfolio in 2011, more than offsetting losses elsewhere in what was one of the more turbulent years on record.

TransCanada, however, was never really caught up in the buying wave, mainly because of investor trepidation about Keystone. The upshot is it’s still a fairly cheap stock. Moreover, even if the rest of Keystone never gets built, management has targeted some CAD50 billion in potential energy infrastructure projects, including CAD12 billion in the works for startup by 2015.

That includes a restart of the Bruce Power nuclear plant in Ontario, a project so massive it can potentially generate up to 25 percent of the province’s electricity needs. The largest nuclear plant in North America, Bruce is already under long-term contract with the provincial power authority and is on track for startup by the second half of this year.

Once it does the cash will immediately start flowing to TransCanada’s bottom line, providing fodder for more dividend growth as well as further investment in growth. That’s the fuel for superior total returns from this low-risk company.

TransCanada–a worthy alternative to any of the energy infrastructure companies in the Conservative Holdings–is a buy up to USD45.

AltaGas is a buy up to my raised target of USD32. See High Yield of the Month for more on AltaGas.

I’ve also raised my buy target for Keyera Corp (TSX: KEY, OTC: KEYUF). Keyera is now a buy up to USD44. See Portfolio Update for more on Keyera.

Electric Gold

Fortis Inc (TSX: FTS, OTC: FRTSF) lost its bid for Central Vermont Public Service Corp (NYSE: CV) to another Canadian company, which is set to combine it with another Vermont utility later this year. But that didn’t stop management from trying to mine more electric gold in the US, launching a roughly USD1 billion bid for New York State-based electric and gas distribution utility CH Energy Group Inc (NYSE: CHG).

That offer still has a ways to go before consummation, needing approval from often-contentious Empire State regulators as well as the increasingly unpredictable Federal Energy Regulatory Commission. And it also faces potential opposition from some shareholders, who want Fortis to pay more.

The prospect of having to pay more–as well as conceding to regulatory demands–is a good reason for caution on Fortis stock, despite the company’s fairly robust fourth-quarter earnings. Fortunately, it’s far from the only Canadian company making a power move into the US.

Conservative Holding Atlantic Power Corp’s (TSX: ATP, NYSE: AT) merger with Capital Power LP, for example, more than doubled its market capitalization and generating capacity. That’s dramatically diminished its former dependence on individual power sales contracts, such as two set to expire in Florida by 2014. And it’s left the company in prime shape to continue its robust expansion on both sides of the border.

In January Atlantic bought a 51 percent interest in Canadian Hills Wind LLC, whose primary asset is a 300 megawatt wind power facility in Oklahoma. Construction is set to begin on the project by April at a total project cost of roughly CAD460 million. It will go into service in November, in plenty of time to earn wind power tax credits, which will expire for new projects at the end of 2012 if they’re not extended.

That’s a timely move to lock in long-term, stable cash flows–output is fully contracted for 20 years–that is only possible thanks to Atlantic’s greater post-merger scale.

Ditto the company’s investment in late 2011 for a 30 percent interest in an 80 megawatt wind facility in Idaho.

As was the case pre-merger, Atlantic’s post-merger power mix is still heavily weighted toward natural gas.

This should prove to be a huge added advantage to the company going forward, as it’s able to lock in much lower fuel prices for its facilities, undercutting wholesale power market rivals on price while preserving or even padding margins.

That’s a smart strategy for a Canadian company doing a booming US business.

The addition of Canadian assets does provide a natural currency hedge to the US assets that contribute the bulk of Atlantic’s cash flow. But management has consistently shown itself adept at limiting currency exposure in some very wild times, by virtue of knowing at all times where its cash is coming from.

Atlantic promised a 3 percent to 5 percent dividend increase when it completed the Capital merger. It delivered 5 percent-plus. That’s the kind of achievement I expect to see from this company for a long time to come, as it takes what the market gives it to boost shareholder value. Buy Atlantic Power up to USD16 if you haven’t yet.

Algonquin Power & Utilities Corp (TSX: AQN, OTC: AQUNF) has had a very nice run since I featured it for its budding US empire in June 2011. But its partner Emera Inc (TSX: EMA, OTC: EMRAF) is a solid power play at current levels.

Emera currently owns roughly 25 percent of Algonquin, making it a potential merger partner despite management’s frequent denial of intent. It’s also the company’s partner is a range of ventures, including to build wind capacity in the Northeast US.

Emera’s primary asset is Nova Scotia Power, a large very profitable regulated utility that drives company earnings by investment. The company owns US assets directly, including two regulated Maine utilities. And through Algonquin, it now has stakes in water, power and natural gas distribution utility assets throughout the US, including California, Missouri, Iowa and Illinois. Algonquin holds these assets under its rapidly growing Liberty Energy subsidiary.

The Maine power market is still dominated by oil-fired power, a consequence of geographic isolation. That makes its electricity among the most expensive in the country, a problem Emera and Algonquin are attempting to solve by upgrading infrastructure and transmission to the state, with the cornerstone investment the proposed Northeast Energy Link project. That would bring low-cost Canadian power to the state, mainly from giant dams on the other side of the border. It also taps into the large string of wind power projects the company has under way.

US expansion has lit a fire under Algonquin’s growth and by extension Emera’s, as full-year earnings soared 19.2 percent. That’s sure to fuel commensurate dividend growth in 2012, even as Emera/Algonquin continue to use the strong Canadian dollar to acquire still more cash-generating assets. Buy Emera up to USD35, Algonquin Power & Utilities on dips to USD6 or lower.

Brookfield Renewable Energy Partners is now a major investor in the US, after combining its assets with those of its parent Brookfield Asset Management (TSX: BAM/A, NYSE: BAM). These assets are primarily hydropower facilities, backed by dams which smooth out the impact of changing waterflows on output.

This makes cash flows from the US remarkably steady and predictable, allowing management to smooth out exposure to currency swings. And there’s abundant opportunity for growth from new investment as well.

Brookfield Renewable Energy Partners is a solid buy up to my target of USD27.

Finally, Conservative Holding Just Energy has proven its ability to navigate just about anything in the energy space. The company’s retail power marketing business runs best when the prices of wholesale electricity and natural gas are high and volatile, as consumers and businesses are anxious to lock in prices under the contracts they offer. Margins are earned by effectively buying more cheaply than the contract price.

The current situation for Just Energy, however, could scarcely be more opposite. Rather, crashing natural gas prices have taken down the spot price of wholesale electricity in state after state, with little relief in sight.

That should be a strong disincentive for any consumer or business to switch energy providers. But the company enjoyed a 12 percent boost in adjusted cash flow–its primary measure of profitability–for its fiscal 2012 third quarter (ended Dec. 31). That was backed by a 9 percent jump in margins and customer growth that accelerated from the previous quarter, when gas prices were much higher.

The pressures of low gas and electricity prices look set to continue well into calendar 2012, if not beyond. But these results show Just Energy is solid as ever–in fact the quarterly payout ratio fell to just 50 percent.

I don’t expect a dividend increase soon, but that’s a lot of protection for the current yield in the 10 percent range.

Buy Just Energy up to USD16 if you haven’t yet.

Driving for Dollars

Growing transportation and logistics firm TransForce Inc (TSX: TFI, OTC: TFIFF) has been a major winner thus far in 2012. One reason is the company’s continued successful consolidation of the diffuse Canadian freight transport business, most recently demonstrated by a 25 percent jump in fourth-quarter free cash flow on a 36 percent jump in revenue.

TransForce’s foray into the US, though less extensive, has proven no less successful. Last year’s purchase of Dynamax, a Dallas-based parcel and same-day logistics company, opened what CEO Alain Bedard called “the highly fragmented US market.” Profit margin at these operations is running strong at 29 percent, even as management works to cut the costs out of the business.

The company is focused on serving the energy business in the US, with plans in place to grow rapidly in Oklahoma and Texas and to expand the range of service and logistics offerings. That’s a plan that closely follows TransForce’s focus in Canada on serving producers and businesses rather than the more volatile consumer market. And it’s greatly facilitated by the strong Canadian dollar and the enhanced purchasing power it provides.

The bottom line is TransForce is rapidly becoming a North American transportation leader with multiplied opportunities for growth.

My only problem is price after the stock’s recent run-up. But TransForce is a buy on any dip to USD16 or lower.

On the bargain counter right now is Student Transportation. The owner and operator of school bus systems is tapping into a USD18 billion US market of municipal- and district-owned school bus systems. Fiscal 2012 second-quarter revenue rose 24.4 percent, spurring a 19.5 percent increase in cash flow, as the company expanded its reach with acquisitions and new contracts.

The company’s current focus on new business is the Southeastern US, where 90 percent of school districts are district or state owned. Many of these entities are cash strapped and outsourcing–or outright selling–of school bus systems is a key way to save money.

South Carolina’s School Bus Privatization Act will require the state to effectively divest the school bus system to municipal districts, which are likely to outsource from there. Meanwhile, Florida’s legislature is debating a bill that would require the state’s 65 school districts to offer up operation of their bus fleets to the best private bid. And the company is working to get similar measures passed in Alabama, Georgia, North Carolina and Virginia.

With the majority of Student Transportation revenue now coming from the US, currency management is becoming ever-more important to dividends.

Fortunately, the nature of these contracts–which typically contemplate the pass through of fuel costs–makes revenue and cash flow highly predictable from month to month.

That gives the company ample opportunity to lock in exchange rates with hedging. It’s also issued debt in US dollars, providing a further balance.

Fiscal second-quarter cash flow covered the dividend by better than 2-to-1, good for a payout ratio of 45 percent. The full-year ratio is a bit tighter, owing to the seasonal nature of the business–there’s little traffic in summer–which makes dividend growth unlikely in the near future.

But it does provide stability to a yield of more than 8 percent. And with the company planning to ramp up business in Illinois, Minnesota and Michigan as well, it looks like only a matter of time before cash flows are strong enough to finance a boost. Conservative Holding Student Transportation is a buy up to USD7 for those who don’t already own it.

Property Plays

Canada’s property market has been on solid ground since early in the last decade. That’s been a huge opportunity for its real estate investment trusts (REIT), which have been able to grow robustly while maintaining conservative financial policies.

Canadian REITs have also steadily pushed into the US over the past few years, taking advantage of distressed conditions to buy quality properties on the cheap. In many cases the purchases are already producing superior cash flows. And with acquisition costs behind them money is only starting to flow.

That’s definitely true for Conservative Holdings Artis REIT (TSX: AX-U, OTC: ARESF) and RioCan REIT (TSX: REI-U, OTC: RIOCF).

Artis’ US expansion is part of a concerted effort by the company in recent years to diversify away from its initial core in Alberta. Market conditions in Canada’s energy and resource patch are far more cyclical than elsewhere.

The company was able to weather weak conditions in the aftermath of the 2008 crash, largely thanks to well below market rents at its properties.

This is still the case today. But now with operations throughout Canada as well as in US states such as Minnesota, the REIT is in much better shape to handle a slump and is positioned for growth as never before.

Artis’ unit price has bumped up against my buy target. I won’t raise it until we see a raise in the monthly payout. We may not have long to wait on that. But Artis REIT remains a buy up to USD15.

RioCan has been even more aggressive in its push south. Canada’s largest owner of retail shopping centers purchased 38 properties in 2011 with a total transaction value of CAD1.1 billion, roughly half of which were in the US. The REIT now has an interest in 45 US properties that contribute 12.5 percent of overall revenue and were a major part of its 20 percent jump in fourth-quarter funds from operations. Same-store growth for US net operating income–a measure of profitability that excludes acquisitions–was 1.9 percent, besting the 1.1 percent growth in Canada.

As in Canada, RioCan is intently focused on the quality of its US portfolio. Occupancy is running at 98.1 percent, and 86.7 percent of revenue is from “national” tenants, including Wal-Mart (NYSE: WMT). Also as in Canada, no single tenant makes up more than 5 percent of overall revenue, the best possible insurance an unexpected problem won’t take down the company. And national tenants are also the best possible springboard to future growth, as they’re the most likely companies to expand.

Recent years’ earnings for RioCan have reflected the cost of making these acquisitions rather than the payoff of additional cash flows. That’s begun to change, demonstrated by the robust fourth-quarter 2011 numbers, and the best is yet to come. And unlike many if not most US REITs the high quality of the portfolio ensures those cash flows against an always possible worsening of overall US property market conditions.

The only problem with buying RioCan now is price. And until there is dividend growth, I won’t be raising my buy target. But this super high-quality REIT is always a buy on a dip to USD25.

Slightly further out on the risk spectrum is Extendicare REIT (TSX: EXE-U, OTC: EXETF). The owner of senior care centers continues to deal with the impact on cash flow of an 11.1 percent reduction in its Medicare rates as well as the lesser fallout of future reductions if the US federal government is unable to reach a budget compromise and prevent a 2 percent across-the-board spending cut in 2013.

The good news is management is ahead of the cost reduction objectives it set for the company when the cuts were announced last year. The debt refinancing is nearly complete at lower-than-expected rates, operating cost cuts have exceeded targets, and higher-margin services are stable. As a result the anticipated drop in cash flow is coming in better than expected.

Extendicare’s fourth-quarter payout ratio expanded out to 143 percent, which includes a reserve taken to insure against the cost of possible future litigation. The payout ratio was 100.4 percent excluding the reserve, which won’ t be repeated in 2012. It will drop further as savings from the debt refinancing and operating cost reductions kick in and as the company completes planned expansion in Canada.

A new Edmonton, Alberta, facility will produce its first full quarter of cash flow in the first quarter of 2012. The company has other projects in the province as well as Ontario coming on stream by early 2013.

Will all that be enough to cover Extendicare’s dividend at its current rate? We’ll have to wait until coming quarters’ numbers to get a real read. And the company’s plans to convert to a corporation could also have consequences, though it has been paying the higher “SIFT” tax for several years.

My bet is still that management will be successful with its plans and will hold all or at least most of the current dividend going forward. And in any case the yield of around 10 percent is pricing in the risk of a modest cut.

Extendicare is still the riskiest property owner in the Canadian Edge Portfolio and definitely an Aggressive Holding.

But for those who understand the potential downside and don’t already own it, Extendicare REIT is still a buy up to USD10.

What to Avoid

All of the companies highlighted above are on track to produce robust profits from US operations in 2012. In fact, coupled with dividend growth, southern expansion is the most likely catalyst for further share price gains this year.

The US economic recovery since mid-2009, however, hasn’t been smooth. Large segments of it remain deeply depressed and an easy place for Canadian companies to stumble.

For example, what is Student Transportation’s boon is clearly New Flyer Industries Inc’s (TSX: NFI, OTC: NFYED) bane. That is, cash-strapped school bus systems are unable to buy New Flyer’s buses, even as they try to save money by outsourcing service.

New Flyer shareholders may catch a break in coming months, if management is successful in selling the company. But at this point, it looks like falling sales and declining order backlog could trigger an even bigger dividend cut this year than the 50 percent management has previously targeted. Sell New Flyer.

Similarly, Norbord Inc (TSX: NBD, OTC: NBDFF) continues to be battered by the weak US housing and homebuilding market. North American cash flow dropped 83.1 percent last year and looks set for another poor performance, despite a decent product line. Sell Norbord.

Canadian companies that rely on non-resource exports to the US have been badly hurt by the Canadian dollar’s strength in recent years. Ten years ago, for example, the loonie was worth only about USD0.60. Today’s rough parity translates into a 67 percent jump in the cost of doing things in Canada versus the US.

That’s a formula for disaster for companies like Ten Peaks Coffee Company Inc (TSX: TPK, OTC: SWSSF), which has already cut its dividend nearly 80 percent over the last decade.

Avoid Ten Peaks and any other Canadian company that pays its costs in Canadian dollars but gets its revenue in US dollars.