Dividend Watch List

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) and GMP Capital Inc (TSX: GMP, OTC: GMPXF) both cut their dividends last month. GMP remains on the Dividend Watch List, while Capstone earns an exit. I’m also adding Labrador Iron Ore Royalty Corp (TSX: LIF-U, OTC: LIFZF) and TransAlta Corp (TSX: TA, NYSE: TAC) to the Watch List because both reported weak first-quarter results.

Starting with the cutters, Capstone will still pay a CAD0.055 per share dividend on Jun. 15 for shareholders of record on May 31. The next payment will then be a pro-rata monthly dividend of CAD0.025 per share on Jul. 16, for shareholders of record on Jun. 29. Thereafter the company will pay a quarterly dividend at a rate of CAD0.075 per unit, with a tentative ex-dividend date of Sept. 26 and a payment date in mid-October.

The change amounts to a dividend cut of roughly 54.5 percent from the current rate. It’s also below the “best guess” of CAD0.035 I gave in last month’s Dividend Watch List. It represents a yield of approximately 7.5 yield based on Capstone’s current price.

The silver lining with the cut is it was already well priced into the stock, which has actually rallied a bit on the news. The key question for those who still hold this former Canadian Edge Portfolio recommendation is whether this represents truly a sustainable payout ratio or is simply another stage in a series of dividend cuts that began in early 2010, when the monthly rate was CAD0.0875 per share.

That first cut to CAD0.055 was billed as a necessary part of Capstone’s eventual conversion from an income trust into a corporation. Management of what was then Macquarie Power & Infrastructure assured investors that it would be the last reduction and that the new rate was sustainable for the long haul.

What changed was a sharp decline in natural gas prices. This has dramatically reduced prevailing wholesale market rates for electric power in Ontario, where Capstone’s Cardinal Power Plant has a sales contract up for renewal with the Ontario Power Authority (OPA). Uncertainty pertaining to the negotiations with the OPA has hung over the stock for the past year and is at the root of the dramatic guidance change in late 2011 that led me to sell the stock from the Portfolio.

At this juncture management’s only comment on Cardinal is there is “improved clarity on the range of outcomes.” The size of the dividend cut and the decision to use a bond offering to pay off a large chunk of Cardinal-related debt are pretty good indications the company is protecting itself from a less-than-optimal deal.

CEO Michael Bernstein this month affirmed Capstone is still targeting a “long-term payout ratio” of 70 percent to 80 percent. That’s also an indication it expects to realize less cash flow from its various power and water assets going forward than it did as recently as a year ago.

On the plus side, once there is a contract for Cardinal Capstone’s cash flows should be as steady and predictable as other companies tracked in How They Rate in the Electric Power category. These include hydro, wind and solar generating facilities operating under long-term contracts with escalating prices, a 50 percent interest in the Bristol Water utility in the UK and a one-third interest in a district heating business in Sweden.

The 14.5 percent drop in adjusted funds from operations in the first quarter of 2012 was largely due to one-time factors related to the continued reshuffling of the company’s businesses. These include the issue of CAD100 million in debt to “recapitalize” the company’s hydroelectric facilities, which also remove a “levelization liability” that had reduced profitability of the these very steady assets. The nearly 30-year maturity of the new bonds and quite low interest rates are also pluses.

Capstone further strengthened its balance sheet with the sale last month of a 20 percent interest in Bristol Water to Japan’s ITOCHU Corp (Japan: 8001, OTC: ITOCF) for CAD68 million. The proceeds have enabled the company to fully pay off its senior credit facility. And combined with the proceeds of the hydropower bond issue, it ensures the pay off of remaining debt maturities this year without a spike in interest costs. The other 30 percent of Bristol is held by operator Suez Environnement Co (France: SEV, OTC: SZEVF).

We won’t have absolute clarity on Capstone’s profitability past 2014 until there’s a new contract for Cardinal. But this new payout level appears to take into account this uncertainty and the possibility that Cardinal’s output won’t command the price it does now.

That’s enough to earn Capstone removal from the Dividend Watch List, though not enough to rate it above a hold for conservative investors. I’ll re-evaluate the stock and possibly raise it to a buy when there’s more clarity on Cardinal–hopefully a multi-year contract. Capstone Infrastructure is a hold.

GMP Capital cut its dividend exactly in half to a new quarterly rate of CAD0.05 per share. That reversed what had been a series of increases starting in mid-2009, when the company converted from an income trust to a corporation with an initial quarterly dividend rate of CAD0.05.

A nickel a share was also the dividend rate following GMP’s initial public offering in December 2003. The company quickly ramped that up in the following years, reaching a payout of CAD0.14 per month in 2008 immediately prior to the financial crisis. That was in addition to regular “special cash” payouts declared at the end of each calendar year.

The onset of the turmoil in the second half of 2008 took the dividend down to CAD0.1042 in September and to CAD0.05 a month in November. It was finally omitted in April 2009, before the conversion and restoration of a quarterly payout later that year.

My point in recanting this dividend history is simply that GMP’s payout is as volatile as the investment markets are. Just as energy producer revenues and dividends depend on the prevailing level of oil and gas prices, so does GMP’s on investment market activity.

Management has tacitly warned for several quarters that it would have to take action on the dividend to preserve financial strength, unless there was a rebound in investment banking and trading activity. That hasn’t happened, and so the company has acted.

On the plus side, GMP has been taking dramatic steps to reduce its cost structure to meet the challenges. And it retains strong positions in its various niches on the Toronto Stock Exchange (TSX). These include holding onto sixth place in underwriting transactions and seventh place in equity block trading volumes, participating in 74 underwriting transactions in Canada and advising on five mergers and acquisitions announced in the first quarter of 2012.

All this suggests the underlying business is still quite vibrant and will rebound when conditions improve. Until then, however, GMP will remain heavily impacted by its business environment, just as it always has been. And the first quarter’s 43 percent revenue decline and 3.7 percent return on equity suggest real improvement may be a while in coming.

The payout ratio is negative, owing to the fact that the company posted a net loss of CAD0.04 per share for the quarter. That was against CAD0.32 per share of income in the first quarter of 2011.

Excluding restructuring charges of CAD0.07 per share–which should reduce future costs and boost profitability–GMP actually earned CAD0.03 per share during the quarter. Even that, however, translates into an unsustainable payout ratio of 166.7 percent based on the lower dividend rate. And it should be said that this company is not a utility. That means a conservative read of real profitability should include such writeoffs rather than exclude them as non-repeatable.

No one should consider GMP’s dividend “safe.” Rather, the appeal of this stock is investors are effectively “partners” in a volatile business that can pay rich dividends or none at all, depending on factors that are largely beyond its control–mainly the health of financial markets.

Given the fear-drenched nature of this market, it’s no wonder GMP’s profits and dividends are down. And so long as that’s the case, the stock belongs on the Dividend Watch List.

On the other hand, no one should be surprised if this stock rallies hard when market conditions do improve. I’m not ready to put out a buy on it yet. But GMP Capital–which has rallied from below CAD5 to CAD6.31 per share since the dividend cut–is a suitable hold for aggressive investors.

Failing earnings are the single biggest reason for dividend cuts. They’re also why the vast majority of companies wind up on the Dividend Watch List.

The tipoff isn’t necessarily a high payout ratio, though that’s often a pretty good warning sign. Rather, it’s that developments have significantly worsened the company’s position and forced management to reconsider its financial strategy.

That was the case for both Capstone and GMP. At this point it’s not set in stone for the other companies on the Watch List. But risks have definitely increased for all of these companies in recent months. And the longer credit markets remain uncertain, the greater the risk at least some of them will cut their dividends.

As we saw with both Capstone and GMP, when a cut is inevitable it will typically be priced in before it actually happens. That may actually lead stocks to rally following the announcement.

A couple of the companies listed below yield upward of 15 percent. It’s hard to argue that substantial risk to their payouts isn’t already priced by the market. On the other hand, there’s always the risk that what happens will be substantially worse than anyone expects. In that case, shareholders who hold and hope face the prospect of huge capital losses as well as reduced cash flow.

Certainly, there are Dividend Watch List companies that are worth that wager, provided investors are willing to take on the risk. By and large, however, conservative investors should get in the habit of swapping out of companies with endangered dividends. That may lock in losses in some cases. But moving their money into something safer will head off the possibility of much worse losses.

This month two companies are joining the Dividend Watch List, both due to lackluster first-quarter results. Labrador Iron Ore’s first-quarter adjusted quarter cash flow shrank dramatically to just CAD0.234 per share from CAD0.75 a year ago. That’s the primary account from which dividends are paid, and it left the company with a payout ratio of 163 percent.

The primary reason for the shortfall was lower royalty revenue from Iron Ore Corp (IOC), the refining facility that contributes substantially all of Labrador’s cash flow. IOC deferred the payment of a dividend due to ongoing labor negotiations and what the company called “substantial” capital expenditures. It’s since reached an agreement with unionized employees that should eliminate this uncertainty.

In addition, the IOC mill’s production was inhibited by winter weather conditions, which delayed full integration of new systems to boost output and efficiency. These measures should increase future royalties, though that may not happen until late in 2012.

Labrador also faces a challenge from a Jul. 20, 2011, Canadian Ministry of Finance ruling, which effectively pronounced a death sentence for “staple shares.” These combine a bond with equity into a single security. The ruling would eliminate companies’ ability to deduct debt interest from a staple share, making it more difficult to maintain the same payment rate.

Most companies trading as staple shares have either converted their shares to ordinary common stock, or else have made plans to do so by Jul. 20, 2012, which is when the new rules kick in. That includes New Flyer Industries Inc (TSX: NFI, OTC: NFYED), which plans to cut its dividend by half at an as yet unspecified date.

To date, Labrador has said only that it’s “studying the effect of this announcement.” The company expects royalty income from IOC to increase the rest of the year, as conditions remain generally strong for iron ore demand globally and the new efficiency measures kick in.

That should offset some of the negative impact of whatever new taxes are absorbed. And it’s possible whatever reduction there is to dividends will only affect the “special cash” payouts the company has made every quarter. In fact, there could actually be an increase in the “special cash” rate going forward, once IOC difficulties are resolved. The special rate was cut to just CAD0.125 per share in the first quarter from CAD0.50 in previous periods.

Until there is clarity, however, risk to Labrador’s current payout will remain elevated, and the company will merit staying on the Watch List. Labrador Iron Ore rates a hold.

TransAlta is an unregulated power producer facing many of the same pressures as US-based merchant generators. The biggest right now is low natural gas prices, which have driven down the wholesale price of electricity in tandem. That’s made the company’s coal-fired power considerably less competitive on fuel costs, even as potential environmental liabilities are driving up operating and capital costs.

In late April TransAlta abandoned a carbon-capture project for an Alberta coal-fired plant on economics. This was despite the fact that “the technology works and capital costs are in line with expectations,” according to a statement from CEO Dawn Farrell.

Rather, the market for carbon dioxide (CO₂) sales and the price of emission reductions “are not sufficient at this time to allow the project to go ahead.” The culprit: Low gas prices, which have made it far cheaper for companies to achieve environmental compliance simply by switching to using natural gas.

The company is also embroiled in a dispute over transportation rates with TransCanada Corp (TSX: TRP, NYSE: TRP) that appears unlikely to be favorably resolved. Even a worst-case outcome would probably not threaten dividends directly. But it could induce a major credit rater to cut the company’s rating, which would drive up the cost of rolling over CAD626 million in debt coming due between now and the end of 2013.

First-quarter results were uninspiring, even with an increase in power plant fleet availability to 91.7 percent of capacity from a prior rate of 90.3 percent. Comparable earnings per share fell to CAD0.20 from CAD0.34 a year ago. That still left enough funds from operations to cover the payout by nearly a three-to-one margin. And Ms. Farrell assured investors that the company “still generated strong cash to cover our dividend, support our sustaining capital and have free cash left over for reinvestment.”

TransAlta also has a key advantage most other North American unregulated power generators don’t share: the strong growth of its core Alberta market, which should keep its output in demand even if wholesale power prices are low.

In light of weak market conditions, however, the company’s dividend risk is currently elevated enough to be on the Watch List. TransAlta rates a hold.

Here’s the current Watch List.  This reflects all first-quarter 2012 earnings releases and guidance calls as well as debt maturing through the end of 2013.

Aston Hill Income Fund (TSX: VIP-U, OTC: BVPIF), a closed-end fund, still yields far above the average for its holdings, meaning the payout is coming from capital and leverage.

Because it’s a fund, downside is probably limited by the diversification of its holdings, the majority of which are solid major corporations. But investors should also note that there’s a substantial position in US stocks, corporate bonds and cash in the fund. And several of the largest holdings pay little or no dividend.

There hasn’t been a dividend cut since late 2009. But there are better funds out there that aren’t taking these risks and are sticking to high-yielding Canadian stocks, which, after all, is the reason for investing in Canada. Switch to one of the Canadian Edge Portfolio’s Mutual Fund Alternatives if you haven’t already. Sell.

Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF) reported first-quarter 2012 earnings in time for the May issue, where I reviewed them along with the April dividend cut.

There’s nothing to suggest the company’s guidance it gave then for global pulp markets has worsened to any degree. What has happened since, however, are operating problems, mainly the failure of two recovery boilers at the Northwood Pulp Mill. In a worst-case, that could make for a third consecutive quarter of dividend cuts.

This company has a very volatile dividend history, due to its dependence on global pulp market conditions and an aggressive payout policy of substantially all income. When times are good, they can be very good indeed. And when they’re bad–as they were in 2009 following the market crack-up–they’re very bad for Canfor.

My view is we’re going to see a higher stock price and dividend in the next couple years. But to the extent global growth slows this year, this company will suffer lower prices and dividends. Canfor’s a hold only for those willing to take on those risks. Hold.

Chorus Aviation Inc (TSX: CHR/B, OTC: CHRVF), a discount airline, reported robust first-quarter earnings. Free cash flow came in at CAD0.27 per share, enough to cover the dividend by nearly a 2-to-1 margin. Thomas Cook Canada had another strong quarter, and the company was able to raise passenger revenue 2.9 percent and cut operating expenses by 3.4 percent. Cash flow rose 37 percent, and free cash flow surged 31.1 percent.

Unfortunately, as I reported last month, the Thomas Cook contract goes away at the end of the year. Worse, the contract arbitration continuing with cash-strapped Air Canada Inc (TSX: AC/A, OTC: AIDIF) looks set to yield a worse arrangement on cost sharing than currently exists. That would drain cash flow and almost certainly force a dividend cut.

A yield of nearly 20 already reflects a great deal of risk. But Air Canada’s situation is dire as it loses business and absorbs high costs, and it will force Chorus shareholders to share the pain one way or the other. That’s not a risk any conservative investor should take.

And a negative outcome with Air Canada could send the stock toward its early 2009 low of less than USD2 per share. Sell.

Colabor Group Inc (TSX: GCL, OTC: COLFF) isn’t causing me nearly as much concern as it did earlier this year. That’s largely thanks to what were actually decent first quarter numbers for the distributor of food and related products as well as management’s success in pushing forward its plans to improve efficiency, such as cutting the number of major divisions to three from eight.

The company faces tough market conditions and almost certainly will for the rest of the year. But a solid distribution payout ratio of 63 percent seems to indicate that the ups and downs in the numbers of recent quarters are more growing pains than anything else.

Encouragingly, comparable sales were up at all divisions, a good sign the company is holding onto business despite tough competition, even as it widens its footprint in Canada. This consolidating of what’s now a dispersed business is my primary reason for liking Colabor, and this appeal is undiminished.

I’m optimistic we’ll see the kind of positive progress in the numbers needed to take it off the List and restore the stock to a buy rating in the near future. Hold.

Data Group Inc (TSX: DGI, OTC: DGPIF) is no Yellow Media Inc (TSX: YLO, OTC: YLWPF). At least that’s the message management has been trying to send for many months, as the stock has traded at a Yellow-like discount despite posting generally solid profits.

Revenue increased by 2.8 percent in the first quarter, while gross margins picked up by 8.8 percent. With its first-quarter earnings release, management reported the company “has been successful in year one” of its strategic plan and is “fully focused on growth in 2012.”

Measures include a number of what the company calls “high-growth digital products and services,” such as web-based direct marketing systems and photo book services launched last September. The company has also made several acquisitions and hired new executives to accelerate growth. And it launched a series of initiatives to cut costs that will show up later this year.

The payout ratio for the quarter was 93 percent, a bit higher than the fourth quarter of 2011. But these results indicate investors are pricing in far too much risk with Data Group’s yield of 13 percent-plus.

Data Group isn’t suitable for conservative investors. But it’s at least a hold for speculators who can be ready for a hasty exit if the numbers do indeed start to deteriorate Yellow-style. Hold.

Enerplus Corp (TSX: ERF, NYSE: ERF) came in with decent dividend coverage in the first quarter, posting a payout ratio of 63 percent despite a sharp fall in realized selling prices for natural gas.

The problem is management has continued to borrow heavily in order to continue its transition from a gas-weighted energy producer to one with a greater reliance on oil and natural gas liquids (NGL). This is putting an increasing premium on cash to fund that growth. And with the drop in oil and NGLs prices last month, cash is likely to be in greater shortage than ever.

Comments by an executive at the Las Vegas Money Show seemed to indicate that the company would put off any decision to cut dividends until later in the year, at which time it would assess future cash flows from natural gas. My question now is whether or not the recent dip in liquids has forced the company’s hand.

In fact, the consensus projection of analysts covering the stock is for a one-third reduction to a monthly rate of CAD0.12 per share. That would still leave a yield of more than 10 percent. But that may not be enough to satisfy investors’ concern that there will be no further dividend cuts.

My view remains prospective downside for Enerplus is probably a bit under USD10 per share. That’s enough to keep me from recommending the stock as anything but a sell.

This is a well-managed company, and I’ll continue to track it in How They Rate as it works through these difficulties. Sell.

EnerVest Energy & Oil Sands Total Return Trust (TSX: EOS, OTC: EOSOF), a closed-end fund, is still paying out a dividend many times what its holdings do, and the yield is quite low in any case.

Of course, management could elect to continue paying out CAD0.0417 per month, as it has since inception in May 2006. At this point, however, it’s simply paying out of capital to maintain the yield, and that can only work for so long.

Switch to one of the Portfolio’s Mutual Fund Alternatives if you haven’t already. Sell.

I liked Extendicare REIT’s (TSX: EXE-U, OTC: EXETF) first-quarter 2012 earnings, as I made clear in the May 11 Flash Alert. I’ve also upgraded it to a buy up to USD9. Nonetheless, I’m keeping it on the Dividend Watch List for the time being. My reasoning is as follows.

First, management has successfully completed a cut-free conversion to a corporation. Second, first-quarter results demonstrate the company has adjusted to the steep cut in Medicare reimbursement to its senior care centers in the US. Cost cuts have, if anything, exceeded expectations, debt refinancing is now substantially complete with huge interest cost savings, and the company has reduced its exposure to marginal and litigious markets like Kentucky.

That makes the stock a bargain at its current price, where it yields upward of 10 percent. It still belongs on the Watch List, however, as we don’t know how deeply US austerity will cut Medicare in 2013 and what management will have to do to deal with it.

I’m impressed with management and optimistic on Extendicare’s prospects for generating steady cash flow and dividends going forward. But Extendicare is for aggressive investors only. Buy under USD9.

FP Newspapers Inc’s (TSX: FP, OTC: FPNUF) earnings dropped 15.2 percent in the first quarter of 2012, even though overall revenue rose 7.9 percent. That was largely because of an 11.4 percent increase in operating expenses, but advertising revenue was also weak, dropping 0.6 percent. Cash flow slid 10.2 percent, and distributable cash flow was worse, falling 33.7 percent and ballooning the payout ratio up to 246 percent.

Perhaps more alarming, however, is the fact that this has been the trend for several quarters. The company has absorbed the cost of new acquisitions to preserve revenue but has seen costs rise from doing so. Meanwhile, its former core print newspaper and advertising business continues to decline.

The yield is well over 14 percent, which does price in a lot of risk. But the dividend has been in decline since late 2008, and the risk of more cuts is considerable and rising. Sell.

GMP Capital Inc (TSX: GMP, GMPXF) is discussed above. Hold.

Labrador Iron Ore Royalty Corp (TSX: LIF-U, OTC: LIFZF) is discussed above. Hold.

New Flyer Industries Inc (TSX: NFI, OTC: NFYED) is enduring one of the worst periods ever for the bus manufacturing industry, as state and local government customers in the US and Canada downsize, delay and cancel orders to deal with tight budgets.

On the plus side, New Flyer continues to innovate, unveiling its first all-electric bus this month, the 40-foot Xcelsior for heavy-duty transit. The prototype was developed in cooperation with the Manitoba government along with Mitsubishi Heavy Industries Ltd (Japan: 7011, OTC: MHVYF) and Manitoba Hydro. This suggests it will have a ready market if and when it progresses to the commercial stage.

New Flyer’s first-quarter unit orders were again lower, dropping 5.6 percent. Average selling price, however, rose by 10.8 percent, pushing overall revenue up by 6.2 percent. Cash flow was lower by 24.1 percent, reflecting lower margins on sales. But free cash flow–the account from which dividends are paid–was higher by 152.4 percent. That brought the payout ratio down to a more manageable 90 percent from negative the previous quarter.

Management has announced a reduction in the annual dividend “no later” than August 2012, in the amount of roughly 50 percent. That should be reflected in the stock’s current price. What’s not is the possibility of a larger cut, either then or at some point in the future.

The key is maintaining order backlog in a market go grim that several larger players are pulling back output. That’s no sure thing, and it’s why this company still belongs on the Watch List. Sell.

Precious Metals & Mining Trust’s (TSX: MMP-U, OTC: PMMTF) place on the List deserves some context. Don’t get me wrong; I’m bullish on metals, particularly mining stocks, which have lagged the prices of the products they sell by a wide margin in recent months.

In every major metals bull market, mining stocks have always wound up leading rather than lagging, and this time should be no different. The trouble with this closed-end fund is it trades at a better than a 20 percent premium to its net asset value. That’s a good indication it’s trading on the value of its yield alone, which isn’t backed up by dividend income in the slightest but is being paid from capital.

A dividend cut would send the price of this fund through the floor. And since investors are paying $1 for less than 80 cents worth of mining stocks, buying laggards like Barrick Gold Corp (TSX: ABX, NYSE: ABX) is a far better way to play the eventual mining stock rebound.

Switch to one of the Portfolio’s Mutual Fund Alternatives if you haven’t already. Sell.

Ten Peaks Coffee Company Inc (TSX: TPK, OTCL SWSSF) provided no good news in its first-quarter report.

Falling coffee prices do reduce costs and should be a plus. But the company had largely hedged its exposure to fluctuations. Meanwhile, its primary customers delayed and cancelled orders in anticipation of lower prices, so processing volumes dropped by 12 percent.

The result was company revenue rose 7 percent but cash flow per share plunged 97.4 percent, as purchases and other costs rose 19 percent. The fact that these results occurred at a time of US dollar strength–61 percent of sales are in the greenback–is even more alarming, as a rebound in the Canadian dollar will hit the value of US dollar revenue and makes Ten Peaks’ product less competitive as well. The end result was the first quarter payout ratio surged to 1,563 percent.

CEO Frank Dennis affirmed following the earnings release that he expected cost saving measures–such as operating the company’s handling and storage facilities–will improve margins going forward. This may prove true. But it’s hard to see how maintaining the current dividend is compatible with staying competitive in this volatile industry.

Don’t chase the yield. Sell.

TransAlta Corp (TSX: TA, NYSE: TAC) is discussed above. Hold.

Zargon Oil & Gas Ltd’s (TSX: ZAR, OTC: ZARFF) fate, simply stated, rests with the direction of energy commodity prices.

Oil and natural gas prices may or may not have bottomed for this year in North America. But time is definitely on producers’ side, as global demand rises and hitherto landlocked energy supplies gain the ability for export. Moreover, oil and gas producer stocks are again getting pretty cheap.

Zargon certainly looks so, with a yield of 11 percent. But investors are best off steering far clear of what appears to be fools’ black gold.

For one thing, the company is selling assets to pay down pending debt maturities, inking two deals so far this month for combined proceeds of CAD36 million. That cash is needed to pay off some CAD178 million in debt maturing between now and the end of 2013. The problem is these are primarily oil-focused properties, and their sale will cut the company’s liquids output by 275 barrels a day. That’s significant for a company that only produced 5,496 barrels per day in the first quarter, a figure that was 7 percent below last year’s output rate.

Natural gas production, meanwhile, was curtailed by 9 percent. On a per-share basis oil and natural gas liquids production fell 14 percent, demonstrating that capital spending efforts aren’t at this point replenishing output. That’s quite alarming. So is the fact that operating cost per barrel of oil equivalent rose another 8 percent during the quarter to CAD16.56, with a direct negative impact on “netback,” or profit per unit produced.

Of course, part of the company’s woes can be chalked up to a 43 percent drop in realized selling prices for its natural gas, which has effectively made sales of 37 percent of production less than profitable. But the failure of drilling efforts to keep up production levels, coupled with asset sales, means output will decline this year.

The company’s target, set in February, is 5,400 barrels of oil and liquids, a level below first-quarter output. Meanwhile, natural gas guidance has been again reduced to 18 million cubic feet per day, well below the first quarter’s 20.03 million cubic feet per day. The company hedges some output. But with gas prices still under CAD2 per million cubic feet in Alberta and oil and NGLs prices lower now than in the first quarter, realized selling prices are likely to be lower as well.

Consequently, unless the company vastly improves drilling results and/or energy prices start rising again, the payout ratio is headed higher the rest of 2012 from the current level of 65 percent. That means another dividend cut, which would almost surely send the stock well under USD10. Sell.

Bay Street Beat

Twenty-five Canadian Edge Portfolio Holdings reported earnings after publication of the May issue. Here’s how Bay Street, Canada’s equivalent to Wall Street, reacted to the numbers.

Beginning with Conservative Holdings that were subject of ratings changes, Cineplex Inc (TSX: CGX, OTC: CPXGF) earned a downgrade at RBC Capital Markets to “underperform” from “sector perform,” though the analyst covering the stock for this house saw fit to boost his price target from CAD28 to CAD29.

Cineplex’s numbers were sufficient, however, to draw an upgrade at Raymond James to “outperform” from “market perform” and a major price-target increase from CAD27 to CAD34.

High Yield of the Month recommendation IBI Group Inc (TSX: IBG, OTC: IBIBF) was downgraded by Scotia Capital to “sector underperform” from “sector perform,” while its price target there was reduced to CAD12 from CAD14.50.

Just Energy Group Inc (TSX: JE, NYSE: JE) earned a downgrade from Jacob Securities Inc to “hold” from “buy,” and its price target was lowered to CAD12 from CAD14.

Keyera Corp’s (TSX: KEY, OTC: KEYUF) first-quarter numbers got it upgraded at BMO Capital Markets to “outperform” from “market perform.” The new price target is CAD49, up from CAD48.

Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) was downgraded by FirstEnergy Capital Corp to “market perform” from “outperform,” though its price target remains CAD32.

As for Aggressive Holdings, Ag Growth International Inc (TSX: AFN, OTC: AGGZF) drew two upgrades with its first-quarter 2012 report. EVA Dimensions boosted the stock to “hold” from “underweight,” but, as is this house’s custom, there is no 12-month price target.

National Bank Financial also upgraded Ag Growth, to “sector perform” from “underperform.” The price target is unchanged at CAD37.50.

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) was downgraded by EVA Dimensions to “underweight” from “hold.” EVA doesn’t provide price targets for stocks it covers.

Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) earned an upgrade from Veritas Investment Research to “buy” from “sell,” though its price target remains CAD43.50. Crescent Point also impressed the analyst at Alta Corp Capital Inc, who lifted the stock to “outperform” from “sector perform” but kept the price target at CAD51.

Extendicare REIT (TSX: EXE-U, OTC: EXETF) was upgraded by EVA Dimensions to “hold” from “underweight,” with no price target provided.

Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) earned itself a downgrade from CIBC World Markets to “sector perform” from “sector outperform,” though its price target is static at CAD15.

Finally, Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) was downgraded by EVA Dimensions from “overweight” to “hold,” with no price target provided.

Here’s a rundown of Bay Street buy-hold-sell ratings for the 25 Canadian Edge Portfolio Holdings that comprise the second wave of reporting season, with the average target price among analysts covering the stock in parentheses.

Conservative Holdings

• Artis REIT (TSX: AX-U, OTC: ARESF)–5–3–0 (CAD17.33)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–1–3–3 (CAD14.61)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–5–2–0 (CAD16.33)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPUF)–5–6–0 (CAD29.11)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–4–6–0 (CAD24.56)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–2–7–3 (CAD30.30)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–3–4–0 (CAD20.13)
• Dundee REIT (TSX: D-U, OTC: DRETF)–5–1–0 (CAD39.63)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–4–2–0 (CAD10.80)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–7–3–1 (CAD15.27)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–3–9–1 (CAD10.81)
• Just Energy Group Inc (TSX: JE, OTC: JUSTF)–2–4–1 (CAD13.25)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–6–2–1 (CAD48.44)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–4–5–2 (CAD33.87)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–6–5–0 (CAD32.05)
• Student Transportation Inc (TSX: STB, OTC: STUXF)–3–2–1 (CAD7.62)

Aggressive Holdings

• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–2–8–0 (CAD40.94)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–3–2–1 (CAD18.31)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–17–4–1 (CAD50.18)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–1–4–0 (CAD8.42)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–7–3–0 (CAD17.00)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–1–0–0 (CAD8.00)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–4–5–0 (CAD14.50)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–10–4–1 (CAD20.81)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–9–4–1 (CAD52.63)

Tips on DRIPs

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 companies 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.

But a handful of companies from among the 200-plus under Canadian Edge How They Rate coverage do afford US investors the opportunity to sidestep brokers and exchanges.

Companies under Canadian Edge How They Rate coverage that sponsor DRIPs open to US investors include:

• Bank of Montreal (TSX: BMO, NYSE: BMO)
• Bank of Nova Scotia (TSX: BNS, NYSE: BNS)
• Baytex Energy Corp (TSX: BTE, NYSE: BTE)
• BCE Inc (TSX: BCE, NYSE: BCE)
• Enbridge Inc (TSX: ENB, NYSE: ENB)
• EnCana Corp (TSX: ECA, NYSE: ECA)
• Nexen Corp (TSX: NXY, NYSE: NXY)
• Pengrowth Enegy Corp (TSX: PGF, NYSE: PGH)
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)
• Potash Corp of Saskatchewan (TSX: POT, NYSE: POT)
• Rogers Communications (TSX: RCI/B, NYSE: RCI)
• Royal Bank of Canada (TSX: RY, NYSE: RY)
• Suncor Energy (TSX: SU, NYSE: SU)
• Telus Corp (TSX: T, NYSE: TU)
• Toronto-Dominion Bank (TSX: TD, NYSE: TD)
• TransCanada Corp (TSX: TRP, NYSE: TRP)

Atlantic Power Corp (TSX: ATP, NYSE: AT), which listed on the NYSE in July 2010, continues to “evaluate options for a Dividend Reinvestment Program” and “hopes to have this option available to shareholders in the future.”

Just Energy Group Inc (TSX: JE, NYSE: JE), which listed on the NYSE in January 2012, has a DRIP but as of yet it’s not open to US shareholders.

Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) completed its acquisition of Provident Energy Ltd on Apr. 9, 2012. The latter, who had been listed on the NYSE, has obviously suspended its DRIP.

The former–or the now combined company–is trading on the NYSE under the symbol PBA. But Pembina Pipeline has not yet made any announcement about its intentions with regard to opening its DRIP to US investors.

Shaw Communications (TSX: SJR/B, NYSE: SJR) also hasn’t yet made its DRIP available to US investors.

Why buy dividend reinvestment plans (DRIP) from individual companies, rather than simply have your broker reinvest dividends?

One reason is it puts up an additional barrier to emotional selling on a bad day. Another is you can achieve much broader diversification with a smaller sum of money, as many DRIPs require you to hold only one share to sign up.

We continue to track Atlantic Power, Just Energy, Pembina Pipeline, Shaw Communications and  others that indicate they’re considering opening a plan to US investors or announce that they will sponsor DRIPs open to US investors on a monthly basis in this space.