The Australian real estate investment trusts (A-REITs) profiled in this month’s In Focus feature are all organized as “stapled securities,” as is Sector Spotlight and new addition to the Conservative Holdings Transurban Group (ASX: TCL, OTC: TRAUF). A “stapled security” is one that combines two or more securities that are generally related and bound together through a single vehicle.

Stapled securities typically consist of one trust unit and one share in the fund’s management company that can’t be traded separately. The trust holds the portfolio of assets while the related company carries out the funds management and or development opportunities.

Although the stapled security must be dealt with as a whole, the individual securities that are stapled are treated separately for tax purposes. For example, if a share in a company and a unit in a unit trust are stapled, the owner continues to include dividends from the company and trust distributions from the trust separately in their income tax return, and the share is a separate capital gains tax asset from the unit so capital gains and losses are determined separately for each asset.

It’s important to note that though these distinctions impact finances for components of the stapled group, the impact on US-based investors from an IRS perspective is nil. These securities are deemed “corporations” within the meaning of US tax law that pay “qualified” distributions.

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.

Alumina Ltd (ASX: AWC, NYSE: AWC) is new to the Watch List this month. Alcoa (NYSE: AA), co-venturer in Alumina’s 40 percent owned (and only) asset, Alcoa World Aluminum & Chemicals (AWAC), forecast a 600,000 metric ton global aluminum shortfall in 2012. The trouble is AWAC did not make a fourth-quarter 2011 distribution to Alumina. Alumina should be able to cover its own divided, an anticipated AUD0.04 per share payment due to be declared within a matter of days.

Alumina didn’t pay a final dividend for 2008 or an interim dividend for 2009, though conditions then were clearly less promising than now. However, given the long-term stress on this wall cause to other parts of the balance sheet and the company’s recent history, it’s prudent to include Alumina on the List. It remains a buy under USD1.50.

Billabong International Ltd (ASX: BBG, OTC: BLLAF), like a lot of old-style retailers–those that actually keep physical shops–are struggling in Australia. Billabong, for its part, embarked on a costly campaign to build out its stores in order to better control pricing, placement and profit potential of the surfwear it makes. It levered up to do so, putting itself squarely in crosshairs should what remains an unlikely case actually unfold and credit markets freeze up again, a la 2008-09. Fear seems to be abating, as European deal-makers get close with Greece, the US continues to show signs of strength and China awaits efforts to reverse the contractive policies put in place in to combat inflation and rising house prices.

But what don’t seem to be changing are consumers’ shopping habits; they’re more frugal, less inclined to splurge on high-priced fashions they can replicate cheaper elsewhere. And the real key is the Internet. Billabong, new to the Watch List, is also downgraded from hold to sell.

QBE Insurance Ltd (ASX: QBE, OTC: QBEIF) management issued earnings guidance that strongly hinted that the dividend is going down when full-year results are reported at the end of February. QBE Insurance is a hold.

Here’s the rest of the Watch List for February entering the peak of earnings season.

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.

Here is a list of companies in the How They Rate coverage universe that have an ADR listing in the US.