Several stocks under AE How They Rate coverage, including specialist driller Ausdrill Ltd (ASX: ASL, Germany: FWG), contract mining services provider MACA Ltd (ASX: MLD, Germany: MKM) and earthmoving equipment outfit Emeco Holdings Ltd (ASX: EHL, Germany: E3A), all three of them buy-rated, are listed in Australia as well as in Germany.

This is significant for AE readers who have accounts with brokerage firms that provide direct access to Canada, the UK, Canada, the UK, Japan, France, Hong Kong and Germany but not Australia, such as E*Trade. You’ll pay extra to trade on the foreign exchange, but these stocks don’t trade on the US over-the-counter (OTC) market.

Ausdrill, a USD1 billion company, counts among its clients Barrick Gold (TSX: ABX, NYSE: ABX), BHP Billiton Ltd (ASX: BHP, NYSE BHP) and Vale (NYSE: VALE) in addition to numerous mid-major and junior players. Management has guided for 32 percent to 37 percent growth in net profit after tax (NPAT) for fiscal 2012, which should put it in position to boost the dividend. A 9 percent increase for fiscal 2011 brought the three-year growth rate to 15 percent, even including a brief reduction in 2010 in the aftermath of the Great Financial Crisis. Total debt is less than 10 percent of current market cap. Fourteen equity analysts cover the stock, 12 of whom rate it a “buy.” There are no “hold” calls on the sock, but two analysts rate it a “sell.” Ausdrill is a buy for aggressive investors willing to seek out dividend growth up to USD3.

Emeco is smaller but still significant at more than AUD600 million in market cap. Average utilization for its fleet earthmoving equipment over the first four months of fiscal 2012 was 90 percent, up from 79 percent over the first half of calendar 2011. Seventy percent of its revenue comes from blue-chip miners and mining contractors. Ten analysts rate Emeco a “buy,” while three rate it a “hold.” Back to dividend growth after pulling in its horns during the GFC, Emeco Holdings is a buy for solid capital appreciation prospects as well up to USD0.95.

MACA, the runt at just a quarter of a billion Australian dollars, offers full “mine to mill” services: drill and blast, load and haul, crush and screen, and civil services to boot. Its mid-tier clients are concentrated in Western Australia, focusing primarily on iron ore and gold. The order book stands at AUD1.4 billion, with projects contracted out to fiscal 2020. The company, which went public in October 2010, offers a great deal earnings visibility.

MACA should be relatively insulated from global macroeconomic uncertainty because it and other companies like it are in strong negotiating positions because of tight contractor capacity. And its exposure is at the production stage, meaning it gets paid on a contract basis to get stuff out of the ground.

Tied to growth in Australian gold and iron ore production based on emerging market demand, MACA’s strong balance sheet, including a net cash position of AUD13 million, puts it in good position to capitalize on high “tendering”activity Down Under. MACA sports a dazzling eight-zero-zero buy-hold-sell line among analysts who cover it. Buy MACA for long-term total return.

More Analysis

Bloomberg’s system of standardizing recommendation language across brokerage houses and borders provides an interesting way of tracking sentiment among an important group of market participants. As we’ve learned by engaging in a similar exercise in AE’s sister letter Canadian Edge, the analyst community is conservative and moves pretty much as a group. Their focus, as a rule, is on capital appreciation, with price targets a close second to the straight-up action advice on the priority list.

In addition to MACA Ltd (ASX: MLD, Germany: MKM) one other AE Basic Materials company posted a perfect buy-hold-sell line, new Aggressive Portfolio addition Rio Tinto Ltd (ASX: RIO, NYSE: RIO). All 19 analysts that cover the stock rate it a buy, with an average target price of AUD93.45. That’s significant upside from Rio’s AUD65.21 Jan. 13 closing price on the Australian Securities Exchange.

Read more about why we rate Rio Tinto a buy up to USD75 and have added it to the AE Portfolio Aggressive Holdings in one of January’s Sector Spotlights.

Basic Materials stocks were the worst performing group under AE How They Rate coverage for calendar 2011, posting an average loss, taking account of capital loss plus dividends, of 26.4 percent.

The group also included the biggest gainer in the S&P/ASX 200 Index for 2011, mineral sands producer Iluka Resources Ltd (ASX: ILU, OTC: ILKAF). Following a 73.5 percent total return in 2011 13 analysts still have a “buy” rating on the stock, while two call it a “hold.” Two analysts have taken note of the rally and advise “sell.” We rate Iluka Resources  a buy up to USD16.50.

The biggest loser in the AE Basic Materials group was BlueScope Steel Ltd (ASX: BSL, OTC: BLSFF) with a 78.5 percent loss. A six-five-one buy-hold-sell line is actually relatively bearish. Sell BlueScope Steel.

Dividend Watch List

The business of Australian Edge is to identify businesses capable of paying sustainable and growing dividends over time. The corollary of this mandate is to identify those businesses that are not capable sustaining or growing dividends.

The Watch List is unchanged this month, as no numbers of significance have been released by How They Rate companies.

Basic Materials

Aditya Birla Minerals Ltd (ASX: ADY, ABWAF)–Having declared its first dividend since May 2008–AUD0.09 per share paid in June 2011–Aditya announced that its directors “not recommend the payment of a dividend in respect of the first half of 2012.” Hold.

BlueScope Steel Ltd (ASX: BSL, OTC: BLSFF)–Negative payout ratio, onerous union burden on cash flow, unfavorable operating environment and a high debt burden make for an ominous stew for a company with one recent dividend suspension. Sell.

Iluka Resources Ltd (ASX: ILU, OTC: ILKAF)–Stock is riding high, and recent results have been solid. But rare-earths miner just recently restored the dividend after a three-year hiatus, and the payout ratio is on the high side. Buy < USD16.50.

Kingsgate Consolidated Ltd (ASX: KCN, KSKGF)–Already patchy gold-mining operations have been hurt by “50-year rains” inundating Thailand operations, which doesn’t bode well for troublesome cash costs. Hold.

OneSteel Ltd (ASX: OST, OTC: OSTLF)–Many headwinds force management to trim fiscal 2012 guidance. Dividend is down more than 20 percent since 2008, including recent reduction to AUD0.04 from prior AUD0.06 per share “final” payment. Hold.

Consumer Goods

Goodman Fielder Ltd (ASX: GFF, OTC: GDFLF)–Successful refinancing at lower cost relieves some pressure on cash flow. A negative payout ratio and a record that shows four cuts over the past five years earn it a spot on the List. But this food retailer’s dividend demonstrates a not-unusual, more flexible approach to dividends often seen in Europe and Australia as well the impact of varying levels of “franking,” or tax covered by the paying company. The refinancing earns it an upgrade from “sell.” Hold.

Consumer Services

APN News & Media Holdings Ltd (ASX: APN, OTC: None)–Advertising fundamentals continue to deteriorate. Dividend is down 30 percent over the past three years, including two cuts. Sell.

David Jones Ltd (ASX: DJS, ADR: DJNSY)–Has cut twice during the past five years to a level that should hold barring a complete, unlikely collapse of the Australian economy. Ominous management guidance tone suggesting potential overabundance of caution is sufficient cause for inclusion on the List, though. Hold.

Seven West Media Ltd (ASX: SWM, OTC: None)–History of cuts, high yield, big payout ratio and continuing challenges of advertising dependence make another dividend reduction more likely than not, despite strength of Seven network. Hold.

TABCORP Holdings Ltd (ASX: TAH, OTC: TABCF)–Has cut three times in recent years, including with most recent payment, demonstrating it, too, has a flexible policy that changes with economic conditions. Hold.

Industrials

CSR Ltd (ASX: CSR, CSRLF)–Cost-cutting, lower interest costs mask impact of weak environment for building-products supplier. Return to health of residential real estate market will do this otherwise solid outfit well. Hold.

The ADR List

Dividend Watch List member David Jones Ltd (ASX: DJS, ADR: DJNSY) now has an unsponsored American Depositary Receipt (ADR) trading stateside. It’s worth one underlying share traded on the Australian Securities Exchange (ASX). We’ll continue to track the How They Rate coverage universe and beyond for Australia-based companies that afford US investors the convenience of ADR investing, either through their own doing or via the effort of an interested financial institution.

Here again is our primer on Australian stocks, US over-the-counter (OTC) symbols and ADRs.

The great majority of the companies comprising How They Rate have US symbols, many because they actively seek to raise capital here on their own accord. That means they comply, to varying degrees, with US Securities and Exchange Commission filing requirements for foreign companies and with US accounting principles. Others trade here because a sponsoring institution has effectively created a secondary market for the shares, without the underlying company’s active participation.

Shares traded on US over-the-counter (OTC) markets bearing a final “F” in their five-letter symbols are basically home-listed shares trading in a market created by and for US institutions. Individuals can buy and sell here, too. Prices basically reflect Australian Securities Exchange (ASX) prices and also reflect changes in the relationship between the US dollar and the Australian dollar. One “F” share represents one ASX-listed share. The dividend you receive in respect of an “F” share is the dividend paid in respect of the ASX-listed share, adjusted for currency effects.

An American Depositary Receipt (ADR) is a certificate that represents stock of a foreign company. ADRs are listed on US stock exchanges or the OTC Bulletin Board or Pink Sheets. Those that trade OTC have five-letter symbols ending with the letter “Y.” All transactions, including dividend payments, are conducted in US dollars.

One ADR certificate may represent one or more shares of the foreign stock; it can also represent a fraction of a share. For example, one Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY) ADR, which trades under the symbol TLSYY, is worth five ordinary shares that trade on the Australian Securities Exchange under the symbol TLS. Australia & New Zealand Banking Group Ltd’s (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) ADR, ANZBY, is worth one Australia-listed ANZ share.

Because many ADRs don’t have a one-to-one ratio between the depositary receipts and the shares of stock, financial ratios are often not included in stock listings. Data in Australian Edge Portfolio tables and How They Rate is derived based on Australian Securities Exchange symbols so is as complete as you’ll find anywhere.

Foreign companies themselves often “sponsor” the creation of their own ADRs. These are called “sponsored ADRs.” There are three levels of sponsorship.

A Level I sponsored ADR is created by a company because it wants to extend the market for its securities to the US. It does not, however, want to register with the Securities and Exchange Commission (SEC) or conform to generally accepted accounting principles (GAAP). Level I ADRs trade on the OTC Bulletin Board or Pink Sheets trading systems, usually but not exclusively by institutional investors. Australia & New Zealand Banking Group’s is a Level I ADR.

Level II and Level III sponsored ADRs must register with the SEC, and financial statements must be reconciled to generally accepted accounting principles. A Level II ADR requires partial compliance with GAAP, while a Level III ADR requires complete compliance. A Level III sponsorship is require if the ADR is a primary offering and is used to raise capital for the company. Only Level II and Level III sponsored ADRs can be listed on the New York Stock Exchange (NYSE), the American Stock Exchange or Nasdaq. Telstra Corp sponsors a Level III ADR in the US, meaning it’s actively seeking to raise capital here.

An unsponsored ADR is created by a US investment bank or brokerage that buys ordinary shares on the underlying company’s home market then deposits them in a local custodian bank. This depositary bank then issues shares that represent an interest in the stocks and handles most of the transactions with American investors, serving both as transfer agent and registrar for the ADR.

The shares of the foreign stock held in the custodian bank are called “American Depositary Shares,” although this term is sometimes used as a synonym for “American Depositary Receipts.” Unsponsored ADRs can’t be listed on the major American stock exchanges because they aren’t registered with the SEC and lack other necessary qualifications.

The price of an ADR is determined by supply and demand but will generally track the price of the underlying ordinary share. When dividends are paid, the custodian bank receives it and withholds any foreign taxes, exchanges it for US dollars and then sends it to the depositary bank, which then sends it to the investors.

The US depositary bank handles most of the interaction with US investors, including rights offerings, stock splits and stock dividends. Sponsored ADR investors may receive communications, including financial statements, directly from the company.