Editor’s Note: In Brief is the executive summary of the July 2012 issue of Canadian Edge. We’ve condensed it this month to provide a more concise guide to reading the issue. — RSC

Risk on, risk off: The big institutions that dominate daily market trading can’t seem to make up their minds on where the global economy is going. That’s why they’re constantly shifting from what’s considered safe–mainly US Treasuries–to everything else and back again.

The result is dividend stock investors have been taken on an emotional roller-coaster this summer. And more than a few have apparently opted to get off and out of markets entirely, at least until things calm down.

That’s certainly understandable, particularly for those who live off their investments and who lost big in 2008. Unfortunately, exiting now is a real mistake they’ll soon regret, just as sellers at market bottoms the past three years have, no doubt, and many times since.

Yes, the market volatility we’ve seen the past several years is almost certainly going to continue. That’s simply part and parcel of the dominant role block-trading plays today, even for dividend-paying stocks that have long been the province of long-term-minded individuals and funds.

Managers of large dollars are constantly evaluated and, unless they have the job security of Warren Buffett, most can’t afford to patiently seek value. Rather, they’ve got to ride the prevailing momentum, and their moves add geometrically to volatility.

Fortunately, what they do is basically irrelevant for anyone who really thinks and bets with a long-term focus. Volatility and momentum rule the near term but are constantly reversing.

Companies’ ability to grow their businesses and dividends over time is what determines what stocks’ return to shareholders.

My view is still that the market of 2012 is a near match for what we saw in 2010 and 2011. Europe’s credit problems are far from resolved, and the Continent is mired in its worst recession in decades. US growth, never torrid the past few years, may be slowing. And even Asia, the world’s growth engine over that time, isn’t growing as fast.

Generational stock market events like the 2008 crash, however, are only possible when there’s an awful lot of leverage in the system, and enough people leaning bullish to get caught out. Neither is the case today.

Moreover, even in 2008, stocks of companies that stayed healthy and paid dividends recovered fully when the macro crisis passed. So long as investors were able to weather the emotional roller-coaster and stick with high quality stocks, they’ve been made whole and then some since.

If you’re a trader you need to be concerned about momentum and ready to act accordingly. If you’re in this for income and long-term wealth-building, however, you simply can’t afford to be distracted from value–that is companies’ ability to pay and increase dividends going forward.

Highlighting value-rich stocks for Canadian Edge readers is and will always be my primary goal. Not every Portfolio pick is trading below my buy target now. For those stocks, I continue to advise using buy limit orders highlighted in last month’s Portfolio Update and revisited this month.

But there’s also plenty on the bargain counter this month. That includes my favorite Canadian natural gas producers. Their long-term value was confirmed last month by the takeover of Progress Energy Resources Corp (TSX: PRQ, OTC: PRQNF) for a 77 percent premium to pre-deal prices.

Here’s what’s in the rest of the issue.

Portfolio Action

I’m not making any changes to the Canadian Edge Portfolio this month other than raising Cineplex Inc’s (TSX: CGX, OTC: CPXGF) buy target to USD30 from USD28 due to that company’s continued growth of its business. Second-quarter 2012 results will provide the next major opportunity to evaluate my recommendations’ strengths and weaknesses.

Shaw Communications Inc (TSX: SJR/B, NYSE: SJR) is on a slightly different reporting schedule and has released solid numbers.

Here’s when the rest are scheduled to announce, with confirmed dates where appropriate and estimated dates elsewhere. Look for a brief Flash Alert around the time of the release and in depth analysis for most of these companies in the August issue.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Jul. 27 (estimate)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Aug. 8 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Aug. 13 (estimate)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Aug. 13 (estimate)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPUF)–Aug. 15 (estimate)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Aug. 9 (estimate)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Aug. 10 (estimate)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Aug. 9 (estimate)
• Dundee REIT (TSX: D-U, OTC: DRETF)–Aug. 3 (estimate)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Aug. 8 (estimate)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–Aug. 13 (estimate)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Aug. 10 (estimate)
• Just Energy Group Inc (TSX: JE, OTC: JUSTF)–Aug. 10 (estimate)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Aug. 8 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Aug. 14 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–Aug. 3 (estimate)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Aug. 7 (estimate)
• Shaw Communications Inc (TSX: SJR/B, NYSE: SJR)–Jun. 28 (reported)
• Student Transportation Inc (TSX: STB, OTC: STUXF)–Sept. 21 (estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–Aug. 2 (estimate)

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–Jul. 27 (estimate)
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Aug. 13 (estimate)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Aug. 3 (estimate)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Aug. 3 (estimate)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–Jul. 20 (estimate)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–Aug. 10 (estimate)
• Extendicare REIT (TSX: EXE, OTC: EXETF)–Aug. 9 (estimate)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Aug. 3 (estimate)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Jul. 23 (confirmed)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Aug. 3 (confirmed)
• Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–Aug. 10 (confirmed)
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–Aug. 8 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Aug. 10 (estimate)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–Aug. 3 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–Aug. 2 (confirmed)

High Yield of the Month

High Yield of the Month features the two best buys for July. If you’re starting a portfolio, buying HYotMs each month is one good strategy, provided the picks meet your own risk/reward preferences.

This month’s choices are both energy producers in the Aggressive Holdings with a focus on natural gas: ARC Resources Ltd (TSX: ARX, OTC: AETUF) and Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF). Unlike their peers, they have the low costs, rich reserves and strong finances to weather current low prices as well as to take advantage of sector weakness. And they’re also prime candidates for windfall gains should a foreign giant wish to lock up valuable Canadian shale reserves, as Malaysia’s Petroliam Nasional Berhad, better known as Petronas, did last month with Progress Energy Resources Corp (TSX: PRQ, OTC: PRQNF). 

Feature Article

Dividend growth is the fuel that pushes stock prices higher over time. Conversely, companies that cut dividends at best always underperform as stocks, and at worst a payout reduction can be the prelude to a complete crackup.

Here’s my 12-month dividend growth forecast for the Canadian Edge coverage universe, including who’s in line for increases, who’s in danger of cutting and what companies are most likely to keep paying what they do now.

Canadian Currents

Australia’s first resource boom, in the mid-19th century, was focused on gold. In the late 20th century attention shifted to coal and iron ore, as China’s reemergence on the global economic stage commenced in earnest.

Now, with importers such as Japan shifting away from nuclear power, the Land Down Under is poised to benefit from ample stores of natural gas and aggressive efforts to export that commodity in the form of liquefied natural gas (LNG).

That’s the subject of the June In Focus feature for CE’s sister letter Australian Edge, and it’s available here in abridged form.

Tips on Trusts

This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section, accessible by clicking on the “Resources” item in the bar at the top of the Canadian Edge website.

Dividend Watch List—Enerplus Corp (TSX: ERF, NYSE: ERF) cut its dividend in half last month. We continue to rate the stock a sell, mainly because of better alternatives to play a rebound in oil and natural gas.

See Dividend Watch List for more endangered payouts.

Bay Street Beat—Shaw Communications Inc (TSX: SJR/B, NYSE: SJR) is the first CE Portfolio Holding to report earnings this season. Here’s how Bay Street reacted. We also provide a summary of analyst opinion on the balance of the Portfolio ahead of the heat of second-quarter reporting season.

Tips on Drips—Reinvest your dividends paid by New York Stock Exchange-listed Canadian companies–in some cases at a discount and without paying commissions.

How They Rate

CE Safety Ratings are based on six operating and financial criteria. Companies meeting all six criteria are rated my highest rating of “6.” “0” is the lowest rating, indicating companies that meet no safety criteria. Safety criteria are described in the text below the How They Rate table and are as follows:

• One point if Payout ratio meets “very safe” criteria for the sector.
• One point if Payout ratio has longer-term visibility.
• One point if Debt-to-Assets ratio meets “very safe” criteria for the sector.
• One point if the company’s debt maturing before Jan. 1, 2013, is less than 10 percent of its market capitalization.
• One point if the company’s primary business is recession-resistant. Qualifying varies from company to company, though virtually all Electric Power and Energy Infrastructure companies qualify, while no Energy Services companies do.
• One point if the company has not cut its distribution over the preceding five years.

I list trusts and high-yielding corporations by the following sectors:

• Oil and Gas–All energy producers are included here.
• Electric Power–Power generators.
• Gas/Propane–Distributors from propane to packaged ice.
• Business Trusts–A range of businesses involved principally with consumers.
• REITs–All qualified real estate investment trusts.
• Trust Mutual Funds–Closed-end funds holding portfolios of individual trusts.
• Natural Resources–Trusts and corporations that produce resources and raw materials other than oil and gas.
• Energy Services–Trusts and corporations whose main business is providing drilling, environmental or other services to energy producers.
• Energy Infrastructure–Trusts and corporations that own primarily pipelines, processing facilities and other fee-generating assets.
• Information Technology–Trusts and corporations that provide communications, newspaper, directory and other information services.
• Financial Services–Canada’s banks, investment houses and other trusts and corporations feeding that business.
• Food and Hospitality–Trusts and corporations that franchise restaurants, own and operate hotels and manufacture and distribute food and beverages.
• Health Care–Trusts and corporations involved in the medical care and/or supply business.
• Transports–These trusts and corporations ship freight and move passengers by bus, truck, rail or air.

Coverage Changes

NAL Energy Corp no longer trades on either the Toronto Stock Exchange or the US over-the-counter market, and the stock is now delisted from How They Rate. All shareholders should have received 0.86 shares of acquirer Pengrowth Energy Corp (TSX: PGF, NYSE: PGH).

Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF) and Cinram International Inc (TSX: CRW-U, OTC: CRWFF) are in the process of liquidation. I will remove both from How They Rate when that occurs. The August issue will add to coverage the companies David Dittman discusses in this week’s issue of Maple Leaf Memo.

Advice Changes

There’s only one change in buy-hold-sell advice in How They Rate coverage this month, owing mainly to a lack of significant changes in the numbers. Expect more in the August issue, when the vast majority of companies have reported second quarter 2012 results.

Bellatrix Exploration Ltd (TSX: BXE, OTC: BLLXF)–To Hold from Buy @ 6. Management has cut both cash flow guidance and capital spending, due to falling natural gas liquids prices.

Ratings Changes

There are no changes to Canadian Edge Safety Ratings this month, in large part owning to a lack of significant changes in the numbers. By contrast, ratings in the August issue will reflect second-quarter 2012 earnings results and debt maturities for 2012 and 2013 for the vast majority of How They Rate universe and therefore will likely include more changes.

More Information

How They Rate has automatically updated US dollar unit/share prices, dividend payment rates in US dollars, yields, most recent dividend dates, dividend frequency and debt-to-capital ratios. Note that our quote service sometimes includes special annual distributions along with the regular monthly payments.

How They Rate also includes several free links. Clicking on the Toronto Stock Exchange (TSX) symbol will now take you directly to the Google Finance page for every company in the How They Rate coverage universe.

Clicking on the US symbol of a company takes you to a chronological listing of every Canadian Edge and Maple Leaf Memo article in which that trust has been featured. You can also use that page to access articles on other trusts by typing in the relevant exchange and symbol in the “Search Query” box at the top of the page.

For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on dividend paying equities. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission.

The Toronto Globe & Mail features the “Globe Investor” section with all the latest news. Dominion Bond Rating Service is the pre-eminent credit rater in Canada.

The Bank of Canada has a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.

How They Rate can now be accessed several places on the Home Page. The Income Trust Tax Guide has backup to file distributions as “qualified dividends.”

Roger Conrad
Editor, Canadian Edge