The Reserve Bank of Australia (RBA) maintained its target overnight interest rate at 3.5 percent at its Jul. 3, 2012, meeting. The RBA had cut what it calls the cash rate from 4.25 percent to 3.75 percent at its May 1 meeting and from that level to 3.5 percent at its Jun. 5 meeting.

The central bank, which gets together 11 times a year to set monetary policy–or once a month except in January, will issue its next rate decision on Aug. 7.

Concluding his statement announcing the Jul. 3 decision, RBA Governor Glenn Stevens noted, “The Board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate.”

Mr. Stevens acknowledged that the global economy had encountered some resistance after picking up early in 2012 after the late 2011 slowdown, identifying Europe and China as the main sources of recent concern. Asia beyond the Middle Kingdom is showing signs of particular strength in the aftermath of 2011’s natural disasters, but the medium-term picture is clouded by circumstances outside the region. The US continues its jagged and lumpy recovery from the 2008-09 recession. The combined affect has been a drag on commodity prices, which in turn has held back inflation in Australia.

Mr. Stevens noted that global financial markets have “responded positively to signs of further progress towards longer-term sustainability in European financial affairs, but Europe will remain a potential source of adverse shocks for some time.”

Australia is actually benefitting from the troubles abroad, as “low appetite for risk has seen long-term interest rates faced by highly rated sovereigns, including Australia, decline to exceptionally low levels.” The yield on the 10-year Australian government bond, for example, is at historically low levels, around 2.88 percent.

Domestically, Australia is growing faster than anticipated. Though the employment report for June was a downer, with 27,000 jobs lost, overall in 2012 the labor market Down Under has been surprisingly strong. The unemployment rate remains relatively low at 5.2 percent, though it did tick up from 5.1 percent in May.

All in all the RBA saw no basis to alter its outlook for inflation. The RBA’s mandate, loosely defined in Sections 10 (2) and 11 (1) of the Reserve Bank Act 1959, often referred to as the central bank’s charter, has been reduced to the following: “In determining monetary policy, the Bank has a duty to maintain price stability, full employment, and the economic prosperity and welfare of the Australian people.”

In current practice this means the most significant numbers are the consumer price index (CPI) and the producer price index (PPI). The Australian Bureau of Statistics releases such inflation data on a quarterly basis. Year-over-year CPI growth was 1.6 percent from March 2011 to March 2012, while CPI was 1.4 percent. Both remain below the RBA’s long-term target range of 2 percent to 3 percent.

The RBA’s target interest rate remains well above any such similar benchmark in any other developed economy.

The Word on Safety

Following up on last month’s slight revisions to the interpretation of the AE Safety Rating System, the How They Rate coverage universe, including Portfolio Holdings, which were updated as of the June issue, have now been made current.

Here’s a summary of changes.

Basic Materials

Aditya Birla Minerals Ltd (ASX: ABY, OTC: ABWAF) is now rated “2” versus “1” under the prior method of aggregating points under the AE Safety Rating System. The company pays an irregular dividend that’s varied each time one has been paid. It gets no points for raising its payout, and it gets no points for not cutting during the last five years because it omitted a dividend recently.

It is exposed to commodities, being primarily a copper miner. It does, however, have an extremely low debt-to-assets ratio and has no debt coming due before the end of 2013. It therefore merits a “2” under the slightly revised System. Aditya Birla is now a buy under USD0.50.

Alumina Ltd (ASX: AWC, NYSE: AWC) has a low debt-to-assets ratio as well as a trivial amount relative to market cap to rollover on an existing credit facility in November 2013. It is exposed to commodities, but management did raise the interim dividend in August 2011. It also cut its final dividend in February 2012. Alumina, also on the Dividend Watch List due to the murky environment for alumina/aluminum, now rates a “2,” up from “1,” but remains a hold.

Aquarius Platinum Ltd (ASX: AQP, OTC: AQPBF) earns a single point because it has no debt maturities before the end of 2013. Overall debt remains significant relative to total assets, and the company has slashed its dividend to zero in the face of collapsing operating conditions. Up to a “1” on the Safety Rating scale from “0,” Aquarius nevertheless rates a sell.

BlueScope Steel Ltd (ASX: BSL, OTC: BLSFF, ADR: BLSFY) earns two points on the debt criteria but no more. Now rated “2” versus “1,” BlueScope remains a sell.

Fortescue Metals Group Ltd (ASX: FMG, OTC: FSUMF, ADR: FSUGY) makes the leap from “1” to “3” based on the fact that it hasn’t cut its dividend during the past five years and in fact raised its interim payout in February 2012. A manageable payout ratio for a Basic Materials outfit also earns it another point. Fortescue Metals is a buy under USD6.

Grange Resources Ltd (ASX: GRR, OTC: GRRLF) has a low payout ratio and scores points on both of the debt-related criteria, as it has nothing major coming due before the end of 2013 and its overall debt burden is light relative to total assets. Grange, subject of one of this month’s Sector Spotlights and a new addition to the AE Portfolio Aggressive Holdings, now rates “3” on the Safety Rating System and is a buy under USD0.65.

Kingsgate Consolidated Ltd (ASX: KCN, OTC: KSKGF, ADR: KSKGY) earns points for both of the debt-related criteria, as it has light burdens through 2013 and low overall debt relative to total assets. Hold gold producer Kingsgate Consolidated, which is a “2” under the Safety Rating System.

Mincor Resources NL (ASX: MCR, OTC: MCRZF) earns a Safety Rating System upgrade from “1” to “2” because it meets both debt-related criteria: It has no debt and therefore has no maturities coming due through 2013. The nickel producer registered a negative payout ratio for fiscal 2011, though, and cut is final dividend by 66.7 percent from the final payment for fiscal 2010 (AUD0.06 per share) to fiscal 2011 (AUD0.02 per share). Now yielding 6.1 percent and having cut costs significantly, Mincor is a buy for aggressive speculators under USD0.70.

Mount Gibson Iron Ltd (ASX: MGX, OTC: MTGRF) has a low payout ratio and earns two points for its debt profile. Now a “3” according to the Safety Rating System, Mount Gibson is a buy under USD1.50.

Oz Minerals Ltd (ASX: OZL, OTC: OZMLF, ADR: OZMLY) is rare among members of the How They Rate coverage universe in that it actually suffers under our reevaluation: It surrenders two points and now rates a “2,” down from “4.” The prior rating was based entirely on a subjective appreciation for its ample cash balance. The company cut its dividend by 25 percent in February 2012, however, demonstrating that this cash balance is no cushion for the payout. Its payout ratio remains high as well. Oz Minerals, which is yielding 7.1 percent, remains a buy under USD10.50 as a bet on a rebound in copper prices and that it can unleash a nearly AUD1 billion cash position to positive effect.

Panoramic Resources Ltd (ASX: PAN, OTC: PANRF) earns two points because it meets both debt-related criteria. The stock is a buy under USD1.00 because its cash balance and zero debt position it well for an ultimate recovery in the PGM market.

Sedgman Ltd (ASX: SDM, OTC: SGTDF) earns one point because of a dividend increase in the past 12 months and another because of its low overall debt burden relative to total assets. It does, however, have a significant maturity coming due before the end of 2013 (a AUD210 million loan facility that’s fully drawn), and the payout ratio is on the high end. The stock rates a buy under USD2.60.

TFS Corp Ltd (ASX: TFC, OTC: TFSCF) earns a point for not cutting its dividend during the past five years, and it also scores for a low overall debt burden relative to total assets. It does not score on the short-term debt metric, however, and its payout ratio is a bit too high. Hold.

Western Areas NL (ASX: WSA, OTC: WNARF), a nickel miner, gets one point for having a payout ratio below 50 percent. The stock is a speculative buy under USD4.60.

Consumer Goods

Billabong International Ltd (ASX: BBG, OTC: BLLAF, ADR: BLLAY) earns one point simply because its fortunes are not bound to commodities prices. Sell.

GUD Holdings Ltd (ASX: GUD, OTC: GUDHF, ADR: GUDDY) increased both its final dividend for fiscal 2011 and its interim dividend for fiscal 2012. It also earns two points for its debt profile, another for not being sensitive to commodities prices. GUD Holdings, a “4” according to the Safety Rating System and yielding 7.5 percent, is a buy on dips to USD8.25.

Ridley Corp (ASX: RIC, OTC: RIDYF) also jumps from “2” to “4,” as it hasn’t cut its payout in the last five years, its debt profile satisfies both criteria and it’s not sensitive to commodities prices. Ridley, yielding 7.3 percent, is a buy under USD1.30.

Consumer Services

Amalgamated Holdings Ltd (ASX: AHD) earns two points because of a low overall debt burden relative to total assets and minimal maturities coming due before the end of 2013. The company has never cut its dividend, and its fortunes aren’t tied to commodities prices. Amalgamated Holdings, which owns and operates movie theaters and hotels, is a buy under USD6.50.

APN News & Media Holdings Ltd (ASX: APN, OTC: APNDF) earns only one point under the Safety Rating System, because it isn’t tied to commodities. On other score does it earn credit. Sell.

Consolidated Media Holdings Ltd (ASX: CMJ, OTC: CMJFF) is now a “3,” as it has no debt and it isn’t sensitive to commodities prices. The stock has bounced on speculation of a takeover battle pitting News Corp Ltd (ASX: NWS, NYSE: NWS) versus billionaire Kerry Packer. Hold.

Harvey Norman Holdings Ltd (ASX: HVN) is now a “3” under the Safety Rating System because of a low overall debt burden relative to total assets, a low payout ratio and lack of exposure to commodities prices. Strong headwinds for old-school consumer-focused operations, however, and company-specific operating concerns make it a sell.

JB Hi-Fi Ltd (ASX: JBH, OTC: JBHIF) earns an additional point to make it a “3,” as it has no commodities exposure, it boosted its interim dividend in February 2012 and it has a relatively low overall debt burden relative to total assets. Short-term debt, an uncomfortably high payout ratio and an August 2011 dividend cut mean it gets only half the points available under the Safety Rating System. JB Hi-Fi, which is orienting quickly to an online world, is a speculative buy under USD9.25.

Metcash Ltd (ASX: MTS, OTC: MCSHF) announced a 3.1 percent dividend increase on Jun. 28. It also scores points for both debt-related criteria and for not having commodities exposure. A “4” under the Safety Rating System and yielding 8.8 percent, Metcash is a buy under USD4.

Navitas Ltd (ASX: NVT, OTC: NVTZF) hasn’t cut its dividend in the past five years and has boosted it during the past 12 months. It also gets points for both debt-related criteria and for not having commodities exposure. Navitas–and its “5” Safety Rating–is a buy on dips below USD4.

Seven Group Holdings Ltd (ASX: SVW, OTC: SVNWF) hasn’t cut its dividend during the past five years, has no commodities exposure and meets both debt-related criteria under the Safety Rating System. This “4”-rated stock is a hold.

Seven West Media Ltd (ASX: SWM, OTC: WANHF) is now a “2,” up from “1” because it has no debt coming due before the end of 2013 and it has no commodity exposure. Hold.

Tabcorp Holdings Ltd (ASX: TAH, OTC: TABCF) meets both debt-related criteria and has no commodities exposure. A “3” under the Safety Rating System, this gambling-and-gaming outfit is now yielding more than 10 percent. It’s a buy under USD3.15.

Tatts Group Ltd (ASX: TTS, OTC: TTSLF) boosted its interim dividend in February 2012 and hasn’t cut during the past five years. In addition to its point for not having commodities exposure, this gambling-and-gaming company also scores for its low overall debt burden relative to total assets. Tatts Group is a buy under USD2.60.

Wesfarmers Ltd (ASX: WES, OTC: WFAFF) boosted its final dividend in August 2011 and its interim dividend in February 2012. But it also cut twice during the past five years. A low overall debt load relative to total assets is offset by a significant maturity coming due before the end of 2013. The sum total: a “3” on the Safety Rating scale. Wesfarmers is a buy under USD32.

Woolworths Ltd (ASX: WOW, OTC: WOLWF) rates a perfect “6” on the AE Safety Rating System: It has a low overall debt burden, there are no maturities until 2014, it hasn’t cut in the last five years and in fact has boosted twice in the past year, its payout ratio is within reason and it has no commodities exposure. That’s enough to make the stock a buy under USD27.

Financials

Dexus Property Group (ASX: DXS, OTC: DXSPF) rates a “4” under the Safety Rating System because it’s boosted its dividend during the past 12 months, it has a low overall debt burden, its payout ratio is within reason and it’s not exposed to commodities prices. Dexus is a buy under USD0.95.

Mirvac Group (ASX: MGR, OTC: MRVGF) is up to a “4” Safety Rating because of a recent interim dividend increase, a low overall debt burden, manageable short-term maturities and its absence of commodities exposure. Mirvac Group is a hold.

QBE Insurance Ltd (ASX: QBE, OTC: QBEIF) is up to a “3” Safety Rating from “1” because it satisfies both debt-related criteria and it has no commodity exposure. Hold.

Stockland (ASX: SGP, OTC: STKAF) boosted its interim distribution in December 2011, however modestly, and meets both debt-related criteria under the Safety Rating System. It also earns a point for not having direct exposure to commodities prices. A-REIT Stockland, currently yielding 7.6 percent, is a buy under USD3.

Health Care

Cochlear Ltd (ASX: COH, OTC: CHEOF, ADR: CHEOY) earns points for not cutting its dividend during the past five years and for raising it in the last 12 months. It also has a low debt burden and minimal maturities through the end of 2013. The payout ratio is manageable, and it has no direct exposure to commodities prices. That’s a “6.” Cochlear is a buy under USD66.

Fisher & Paykel Healthcare Corp Ltd (ASX: FPH, OTC: FSPKF) has very low debt and no maturities coming due before the end of 2013. The company hasn’t cut its dividend during the past five years, and there’s no direct commodities exposure. That’s a “4.” Fisher & Paykel now rates a buy under USD1.70.

NIB Holdings Ltd (ASX: NHF) has minimal debt and no maturities before 2013 to speak of. The company boosted its interim dividend in February 2012 and has no direct commodities exposure. A “4” under the AE Safety Rating System, NIB is a buy under USD1.50.

Ramsey Health Care Ltd (ASX: RHC, OTC: RMSYF) raised its interim and final distributions during the past 12 months and hasn’t cut its payout in the last five years. It has low overall debt relative to total assets, but it also has substantial maturities coming due in 2012. It earns another point for its lack of commodities exposure, making it a “5” under the Safety Rating System. Ramsey Health Care is a buy under USD20.40.

Sonic Healthcare Ltd (ASX: SHL, OTC: SKHCF) is a “3,” up from a “2” because it hasn’t cut its distribution in the last five years, it has low overall debt relative to total assets and there’s no commodities exposure. There is a significant maturity this year, however, the payout ratio is outside the safe range for the Health Care group, and management hasn’t boosted the dividend during the past 12 months. Sonic Healthcare is a buy under USD12.

Industrials

Adelaide Brighton Ltd (ASX: ABC, OTC: ADBCF) is now a “3” because it meets both debt-related criteria and it’s boosted its dividend during the past 12 months. The stock is a buy under USD3.30.

Amcor Ltd (ASX: AMC, OTC: AMCRF) boosted its final dividend in August 2011 and its interim dividend in February 2012, but it did cut its payout in February 2010. The company has low overall debt but significant maturities before 2013. Absence of direct commodities exposure earns it a third point. Amcor is a buy under USD6.90.

Bradken Ltd (ASX: BKN, OTC: BRKNF) has no direct exposure to commodities prices. It has no debt maturities through 2013, and its overall debt burden is low relative to total assets. It also boosted its interim distribution in February 2012. A “4” under the AE Safety Rating System, Bradken is a buy under USD8.

Brickworks Ltd (ASX: BKW, OTC: BRKWF) hasn’t cut its dividend during the past five years, but its last increase occurred more than 12 months ago. The company’s overall debt burden is low, and it has no maturities through the end of 2013. The payout ratio is also low, and it has no commodities exposure. A “5” under the Safety Rating System, Brickworks is now a buy under USD11.

Campbell Brothers Ltd (ASX: CPB, OTC: CBEBF) earns two points on the debt-related criteria, a point for a low payout ratio and another point for boosting its dividend during the past 12 months. It’s a “4,” however, because its minerals testing business is sensitive to activity in the mining industry and it did cut its payout in 2009. The stock is a buy under USD58.

CSR Ltd (ASX: CSR, OTC: CSRLF) has no debt so earns both points on that front. It also recently boosted its dividend. There’s also no direct commodity exposure. But it did cut the payout during the past five years, and the payout ratio is outside our comfort zone for Industrials. CSR is a hold at these levels.

GWA Group Ltd (ASX: GWA, OTC: GWAXF, ADR: GWAXY) gets a boost from “2” to “4” because of a low overall debt burden relative to total assets as well as the fact that it has no maturities until 2014. It also has no dividend cuts during the past five years and no direct exposure to commodities prices. The stock is a buy under USD2.

Leighton Holdings Ltd (ASX: LEI, OTC: LGTHF) earns points for both debt-related criteria, making its Safety Rating “2.” Sell.

Qantas Airways Ltd (ASX: QAN, OTC: QUBSF) earns its point for not having direct exposure to commodities prices. Hold.

Toll Holdings Ltd (ASX: TOL, OTC: THKUF) has not maturities before the end of 2013 and a low overall debt burden relative to total assets. The payout ratio is reasonable, and there were no dividend cuts during the past five years. Its transport and logistics business has more than indirect exposure to the health of Australia’s resource economy, though, and management hasn’t boosted the dividend during the past 12 months. A “4,” Toll is a hold.

UGL Ltd (ASX: UGL, OTC: UGLLF) earns a “5” under the AE Safety Rating System because it hasn’t cut its dividend during the past five years and boosted the payout twice during the past 12 months. The overall debt burden is light, and there are no significant maturities before the end of 2013. The company has no direct exposure to commodities prices, either. UGL is a buy under USD14.

Oil & Gas

Beach Energy Ltd (ASX: BPT, OTC: BEPTF) is now a “3” under the System because it has no debt and didn’t cut its dividend during the past five years. Beach is a buy under USD1.40.

Boart Longyear Ltd (ASX: BLY, OTC: BOARF) has no debt maturities until 2016, and its overall debt burden is light relative to total assets. The payout ratio is also reasonable. Management did boost both interim and final payments during the past 12 months, but there’s a history of cuts and dividend omissions during the past five years as well. This jagged history means only a “3” Rating. Boart Longyear is a buy under USD4.

Caltex Australia Ltd (ASX: CTX, OTC: CTXAF) goes from “5” to “2” because of dividend cuts and omissions during the past five years with no offsetting increase and a negative payout ratio for the most recent reporting period. It earns points for a low overall debt burden with no significant maturities until 2018. Caltex is a hold at these levels.

Santos Ltd (ASX: STO, OTC: STOSF) is now a “3,” up from a “2.” It meets both debt-related criteria, and its payout ratio is reasonable for the Oil & Gas group. Santos is a buy under USD13.50.

Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF) is a “4” under the AE Safety Rating System. The oil and gas producer has a low overall debt burden relative to total assets and no significant maturities relative to market cap coming due before the end of 2013. The payout ratio is reasonable compared to its peers, and management boosted the interim distribution in August 2011. Woodside is a buy under USD35.

Technology

Codan Ltd (ASX: CDA) has no dividend cuts during the past five years and in fact has consistently made modest increases to its payout. The last increase was more than a year ago, though, which is the only thing keeping it from a “6.” The payout ratio is modest, and the overall debt burden is light, with no significant maturities in the short term. Codan is a buy under USD1.50, and it yields 6.2 percent.

Iress Ltd (ASX: IRE) earns a “4” under the Safety Rating System because it has no debt, it’s made no dividend cuts during the past five years and it has no direct commodity exposure. The reported payout ratio is outside the safe zone for the Technology group, and there’s been no dividend increase during the past 12 months. Iress is a hold.

Redflex Holdings Ltd (ASX: RDF, OTC: RFLXF) earns a “5” under the AE Safety Rating System. The company has no debt maturities until 2014, and the overall debt burden is reasonable relative to total assets. The payout ratio is also modest. There are no dividend cuts during the past five years, but no increases during the past 12 months, either, though a new twice-annual scheme with the second installment to come should complete this part of the equation. Redflex is a buy under USD2.15.

SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF) is also a “5.” The company has no debt and a modest payout ratio. Commodity exposure is minimal, as it does do work for all industry groups but not in a way that’s material to dividend safety. There are no cuts over the past five years. The only piece of the “perfect” puzzle missing is a dividend boost over the trailing 12 months. SMS is a buy under USD6.

Telecommunications

Amcom Telecommunications Ltd (ASX: AMM, OTC: ATMUF) earns two points for its debt profile, as the overall burden is low and there are no maturities before the end of 2013. The payout ratio is also low for the Telecommunications group. Management did trim the dividend in 2008, and there’s been no growth on this front over the past 12 months. All in all Amcom earns a “4” under the Safety Rating System. The stock is a buy under USD1.

Dividend Watch List

Because Australian companies typically report official earnings and declare dividends only twice a year, changes–additions to and subtractions from–the Dividend Watch List will be more static than, for example, the Dividend Watch List compiled for AE’s sister letter Canadian Edge. The CE Watch List is based on the monthly distribution scheme established during the income trust era, which, to the benefit of investors everywhere, persists even after the forced conversion to traditional corporations for many of these stocks. And this twice-yearly Australian rhythm varies as well from the quarterly dividend arrangement to which most US companies adhere.

We do follow close what companies say in their quarterly production or sales reports, their regular trading updates that fall outside the regular reporting schedule and their presentations to investor conferences. We also get clues–often as specific as official guidance figures–out of annual general meetings.

The business of AE 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.

Twenty-one of 107 companies tracked in the Australian Edge How They Rate coverage universe declared a dividend lower than the one declared for their prior corresponding period during the recently concluded earnings reporting season. Several companies have also adjusted downward their earnings forecasts for fiscal 2012.

With recent dividend reductions or changes to guidance the following companies have declared as well their worthiness for inclusion on the Dividend Watch List.

There are no changes to the Watch List this month.

Basic Materials

Aditya Birla Minerals Ltd’s (ASX: ABY, OTC: ABWAF) board approved and management declared a AUD0.05 dividend on May 30, finally getting back to a paying basis after “omitting” a mid-year payment. Revenue for fiscal 2012 was up 7 percent to AUD498.6 million, though net profit after tax (NPAT) was off 54 percent. Fourth-quarter copper production and sales, however, each rose 29 percent.

It appears the company pays an annual dividend, but policy remains “to seek to maximise cash returns to Shareholders whilst having regard to ensuring a sound financial structure for the Company and providing for value accretive development and exploration activities and targeted growth opportunities.” Because there’s no clarity on the payment interval this stock will probably be an emeritus member of the Dividend Watch List. It is, however, a speculative buy under USD0.50 for aggressive investors only.

Alumina Ltd (ASX: AWC, NYSE: AWC) reduced its final dividend for 2011 by 25 percent, in step with guidance issued late in the year. The company reduced its fiscal 2012 output target to 15.5 million metric tons from 15.9 million.

Although the company has undrawn credit facilities to help it through what is an increasingly difficult operating environment for global aluminum companies, absence of any cash flow guidance and rising overall debt levels suggest a dividend cut is highly likely. We’ve cut our rating from buy under USD1.50. Hold.

Aquarius Platinum Ltd (ASX: AQP, OTC: AQPBF) halted operations at its Everest mine, the second such move in recent weeks, as its partners in the Marikana mine in South Africa had previously mothballed the No. 4 shaft due to the continuing weakness for platinum-group metals (PGM) prices.

Marikana accounts for approximately 18 percent of Aquarius’s annual production. This comes after the company reported that fiscal 2012 third-quarter earnings slid 137 percent to a AUD9.4 million loss, as production declined 18 percent and prices for PGMs dove 14 percent. Cash costs, meanwhile, surged by 26 percent.

The company didn’t pay an interim dividend on its fiscal 2012 first-half results. Sell.

Arrium Ltd (ASX: ARI, OTC: OSTLF, ADR: OSTLY), formerly OneSteel Ltd, paid a AUD0.03 per share interim dividend, down 50 percent from the AUD0.06 it paid for the first half of fiscal 2011. Having committed full-bore to identifying itself as an iron ore miner, management and the board asked for and received from shareholders their approval to change to company name to Arrium.

The forecast is for “significant improvement” in fiscal 2012 second-half results, which will be revealed on or about Aug. 21, 2012. Buy under USD0.80.

BlueScope Steel Ltd (ASX: BSL, OTC: BLSFF) announced last October the suspension of its dividend, and it continues to sell assets to generate cash for debt-reduction purposes. The company is struggling to adjust to competitive pressures from steel producers in lower-cost Asian markets. Government aid will help, but this transition is not for dividend-focused investors to wait out. Sell.

Independence Group NL (ASX: IGO, OTC: IPGDF) reduced its interim dividend by 50 percent, but its March quarter production report answered several questions about its ability to establish some consistency in its operations, as cash costs for the period were solid and production was 4 percent higher than forecast. Output from its Jaguar gold mine was 98 percent higher in March than in January and February, and costs were the lowest ever for the project.

A high payout ratio coupled with management’s expressed desire to diversify away from nickel through gold-asset acquisitions suggest a choice may have to be made between investing in growth and sustaining a dividend. Hold.

Panoramic Resources Ltd (ASX: PAN, OTC: PANRF) paid 50 percent less for its fiscal 2012 interim dividend than it did a year ago, as lower realized prices for nickel offset double-digit production growth. March quarter nickel production reached a company record, prompting management to again boost its full-year output guidance. Buy under USD1.00.

Western Areas NL (ASX: WSA, OTC: WNARF) cut its interim dividend 50 percent because of lower sales in the first half of fiscal 2012. Lower realized prices for its nickel offset higher production, though costs trends were positive and management reiterated full-year guidance.

March quarter production trends were solid, and sales hit a record. Concentrate sales for the second half are on track for a 25 percent gain over first-half levels.

Western Areas will remain on the Watch List until it reports final fiscal 2012 results, including dividend details. Buy under USD4.60.

Consumer Goods

Billabong International Ltd (ASX: BBG, OTC: BLLAF) already cut its interim distribution by 81 percent, which we said was likely an interim step on the way to zero. Following a management change, the company issued a new downward revision for forecast fiscal 2012 earnings, before interest, taxation, depreciation and amortization (EBITDA), from AUD157 million to AUD130 million to AUD135 million. New management also said it’s unlikely to pay a dividend for the second half of fiscal 2012 or the first half of fiscal 2013.

The company continues to sell productive assets to generate cash to pay down debt, but its ability to pay remaining liabilities will be impaired by the absence of the full cash flow from said assets. Prior management rejected a AUD3 per share cash buyout offer. Sell.

Goodman Fielder Ltd (ASX: GFF, OTC: GDFLF) didn’t pay an interim dividend. Prior-year comparisons make the decision obvious, as revenue was off 3.7 percent and statutory net profit after tax was down 77 percent. Sequential comparisons show a turnaround may be underway, and management is undertaking a strategic review to assess a problem of size but no scale for its five operating divisions. Hold.

Consumer Services

APN News & Media Holdings Ltd (ASX: APN, OTC: APNDF) reduced its 2011 annual dividend by 28.6 percent from 2010 levels. Statutory net profit after tax (NPAT) slid by 24 percent, though revenue rose 1 percent to AUD1.07 billion. Trimming the dividend will provide more cash as the company undertakes a tough transition to outdoor advertising. But based on current market conditions the company is guiding to a AUD3 million revenue shortfall for the first half of 2012 versus the comparable period of 2011. Debt remains a concern. Sell.

David Jones Ltd (ASX: DJS, ADR: DJNSY) reported that fiscal 2012 third-quarter sales fell 2.9 percent to AUD399. 8 million, while like-for-like sales slid 3.1 percent. Management reaffirmed its guidance for a full-year decline for net profit after tax (NPAT) of 35 percent to 40 percent, as early fourth-quarter activity suggested a carry-through of this weak third-quarter performance.

DJs already slashed its interim dividend by 19 percent, and it appears another reduction may be in the offing as it continues to roll out a new sales strategy built around finally building out a world-class Internet presence.

First-half profit fell 20 percent to AUD85 million from AUD105.7 million a year ago, at the bottom end of company guidance but in broadly in line with market expectations. First-half sales fell 6.7 percent to AUD1.01 billion from AUD1.08 billion a year ago.

DJs, along with most of Australia’s retail sector, has seen earnings slide as cautious consumers have reined in their spending in the wake of concerns over the global and domestic economy. Consumers have also shifted their spending to the Internet to take advantage of the strong Australian dollar to buy from overseas websites. Hold.

Harvey Norman Holdings Ltd (ASX: HVN, OTC: None) trimmed its interim dividend by 16.7 percent, as fiscal 2012 first-half net profit after tax (NPAT) slid 2.1 percent on an 8.2 percent decline in sales. March quarter before-tax earnings slid 44 percent, while nine-month sales fell 25 percent.

The Australian Bureau of Statistics reported that April retail sales declined by 0.2 percent after 10 months of growth, offering little hope for this already struggling franchise. Sell.

JB Hi-Fi Ltd (ASX: JBH, OTC: JBHIF) has the lowest “cost of doing business” in the retail sector, which is cause for optimism as it continues to grapple with a changing operating landscape in the age of Internet shopping as well as a consumer base concerned with the economy. Its CODB did decline in the March 2012 quarter from the prior corresponding period, but management said during a May 4 presentation at the Macquarie Australia conference that full-year net profit after tax (NPAT) would come in between AUD100 million and AUD105 million, well below market expectations of approximately AUD119 million.

March quarter sales were 8.8 percent higher on a sequential basis, while same-store sales rose 1.e percent. Management also stuck to its guidance for AUD3.1 billion full-year sales. But the company also reduced its final fiscal 2011 dividend to AUD0.29 from the AUD0.33 paid for the corresponding period of fiscal 2010, and though recent employment figures in Australia coupled with recent cuts by the Reserve Bank of Australia to its overnight cash rate totaling 75 basis points offer more cause for hope, it remains the case that consumers are watching their spending.

Management also noted that discounting will continue, at least over the next quarter, in this challenging environment. Margins, in sum, are still under a lot of pressure, and so is the dividend. Hold.

Myer Holdings Ltd (ASX: MYR, OTC: MYGSF) posted a fiscal 2012 third-quarter sales decline of 0.9 percent. The biggest worry was the 2.1 percent slide in like-for-like sales, as store open more than a year showed serious weakness. Management expressed a commitment to closing non-performing stores as it gathers itself to compete in a world rapidly shifting away from traditional to online stores.

A downward revision to full-year guidance from a prior forecast of up to a 10 percent decline to a new prediction of up to a 15 percent shortfall earn the stock a place on the Watch List. Hold.

Seven West Media Ltd (ASX: SWM, OTC: WANHF), Australia’s largest diversified media business, announced Apr. 24, 2012, that earnings before interest and taxation (EBIT) for the fiscal year ending Jun. 30, 2012, would be AUD460 million to AUD470 million, about AUD50 million lower than previously expected and below analysts’ consensus forecast of AUD517 million.

“Based on conditions now becoming evident in all segments (TV, Newspapers and Magazines), the previous expectations of the market strengthening in the final quarter are unlikely to be met,” Seven West said in a statement.

Shares slid from a AUD3.77 close on the Australian Securities Exchange (ASX) on Apr. 24 to AUD2.69 May 10, as investors priced in a significant dividend cut; the posted yield is now 16.7 percent. The company will report fiscal 2012 results on or about Aug. 24, 2012. Hold.

Southern Cross Media Group Ltd (ASX: SXL, OTC: SOUTF) management highlighted the fact that “like for like” revenue was off only 2.7 percent from the first half of fiscal 2012 compared to the prior corresponding period. Unequivocal good news can be found in the conclusion that cost-control efforts exceeded expectations; coupled with the cash saved from a 28.6 percent interim dividend reduction Southern Cross should be able to continue to ride out challenging advertising conditions. Buy under USD1.25.

Financials

QBE Insurance Ltd (ASX: QBE, OTC: QBEIF) reduced its 2011 dividend by 32 percent from the rate it paid in 2010; 2011 was a year marked by “unprecedented natural catastrophes and challenging investment markets,” which made hoarding cash a reasonable move. Internal metrics suggest QBE will do well once external conditions improve. For now, however, dividend investors are better off elsewhere. The company will report on results for the first half of calendar 2012 in August. Hold.

Westfield Group Ltd (ASX: WRT, OTC: WEFIF, ADR: WFGPY) cut its full-year 2011 payout by 24 percent. Australia’s biggest REIT by market capitalization is a hold.

Industrials

GWA Group Ltd (ASX: GWA, OTC: GWAXF, ADR: GWAXY), which manufactures building fittings for homes and commercial buildings, didn’t cut its dividend but has already backed off already downbeat guidance it issued along with fiscal 2012 first-half earnings in February.

The company reported an 11 percent sales decline for the six months ended Dec. 31, 2011, as revenue dipped 1 percent to AUD314.9 million. At the time these numbers were released, on Feb. 14, management forecast a 16 percent decline in earnings before interest and taxation (EBIT). On Apr. 10, however, via a trading update, GWA altered its EBIT decline for fiscal 2012 to 20 percent to 25 percent.

Although management once again confirmed its full-year dividend guidance of AUD0.18 per share, this quick turnabout is cause for concern and at least a place on the Dividend Watch List.

GWA Group, which earns a “4” under the updated interpretation of the AE Safety Rating System is now a buy under USD2.

Leighton Holdings Ltd (ASX: LEI, OTC: LGTHF) cut its fiscal 2012 profit guidance by about 25 percent to 38 percent, after more unforeseen problems at two key projects. Writedowns on the value of the assets have wiped AUD254 million from its forecast for the year to Dec. 31.

Leighton posted a AUD104 million before-tax loss for the March quarter, as the Airport Link road and the Victoria desalination plant project continued to exact tolls. Management is sticking to guidance for full-year underlying net profit after tax of AUD400 million to AUD450 million, though, which is a reduction from previous guidance for 2012 NPAT of AUD600 million to AUD650 million. Sell.

Toll Holdings Ltd (ASX: TOL, OTC: THKUF) also warrants a place on the List after chopping its previous guidance for fiscal 2012 underlying earnings before interest and taxation (EBIT) to AUD400 million to AUD420 million from a prior target of AUD450 million. Fiscal 2011 underlying EBIT was AUD436 million.

Australia’s largest trucking company and freight handler has a relatively strong balance sheet, and its operating performance remains sound. But external pressures in the form of a weakening Chinese economy and a still-recovering Japanese economy suggest an overabundance of caution is in order. Hold.

Oil & Gas

Caltex Australia Ltd (ASX: CTX, OTC: CTXAF) paid AUD0.45 per share in respect of 2011 results, down from AUD0.60 in 2010. The refiner’s unaudited March quarter profit showed a 10 percent decline. Hold.

Utilities

DUET Group (ASX: DUE, OTC: DUETF) announced in mid-2011 that it would reduce its payout by 10 percent to reduce debt. The company recently completed an equity offering that reduced net debt, but distribution coverage is still a concern. The stock remains a hold.

Spark Infrastructure Group (ASX: SKI, OTC: SFDPF) reduced its 2011 payout by 25.1 percent, but management forecast 5 percent distribution growth for 2012. Spark Infrastructure is a buy under USD1.40.

The ADR List

We 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 on their initiative or via the effort of an interested financial institution.

Here again is our primer on Australian stocks, US OTC symbols and ADRs.

The great majority of the companies under How They Rate coverage 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 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 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 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 be registered 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, along with the number of ordinary ASX-listed shares the ADR represents.

Basic Materials          

• Alumina Ltd (ASX: AWC, NYSE: AWC)–One ADR is worth four ordinary shares.
• Aquarius Platinum Ltd (ASX: AQP, OTC: AQPBF, ADR: AQPTY)–One ADR is worth two ordinary shares.
• Arrium Ltd (ASX: ARI, OTC: OSTLF, ADR: OSTLY)–One ADR is worth 20 ordinary shares.
• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–One NYSE-listed ADR is worth two ordinary shares.
• BlueScope Steel Ltd (ASX: BSL, OTC: BLSFF, ADR: BLSFY)–One ADR is worth five ordinary shares.
• Fortescue Metals Group Ltd (ASX: FMG, OTC: FSUMF, ADR: FSUMY)–One ADR is worth five ordinary shares.
• Iluka Resources Ltd (ASX: ILU, OTC: ILKAF, ADR: ILKAY)–One ADR is worth five ordinary shares.
• Kingsgate Consolidated Ltd (ASX: KCN, OTC: KSKGF, ADR: KSKGY)–One ADR is worth one ordinary share.
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–One ADR is worth one ordinary share.
• Oz Minerals Ltd (ASX: OZL, OTC: OZMLF, ADR: OZMLY)–One ADR is worth 0.5 ordinary shares.
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–One ADR is worth one ordinary share.

Consumer Goods

• Billabong International Ltd (ASX: BBG, OTC: BLLAF, ADR: BLLAY)–One ADR is worth two ordinary shares.
• Goodman Fielder Ltd (ASX: GFF, OTC: GDFLF, ADR: GDFLY)–One ADR is worth 10 ordinary shares.

Consumer Services

• Crown Ltd (ASX: CWN, OTC: CWLDF, ADR: CWLDY)–One ADR is worth two ordinary shares.
• David Jones Ltd (ASX: DJS, ADR: DJNSY)–One ADR is worth one ordinary share.
• Metcash Ltd (ASX: MTS, OTC: MCSHF, ADR: MHTLY)–One ADR is worth six ordinary shares.
• TABCORP Holdings Ltd (ASX: TAH, OTC: TABCF, ADR: TACBY)–One ADR is worth two ordinary shares.
• Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–One ADR is worth 0.5 ordinary share.

Financials

• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–One ADR is worth one ordinary share.
• Commonwealth Bank of Australia Ltd (ASX: CBA, OTC: CBAUF, ADR: CMWAY)–One ADR is worth one ordinary share.
• National Australia Bank Ltd (ASX: NAB, OTC: NAUBF, ADR: NABZY)–One ADR is worth one ordinary share.
• QBE Insurance Ltd (ASX: QBE, OTC: QBEIF, ADR: QBIEY)–One ADR is worth one ordinary share.
• Westfield Group Ltd (ASX: WDC, OTC: WEFIF, ADR: WFGPY)–One ADR is worth two ordinary shares.
• Westpac Banking Corp Ltd (ASX: WBC, NYSE: WBK)–One ADR is worth five ordinary shares.

Health Care

• Cochlear Ltd (ASX: COH, OTC: CHEOF, ADR: CHEOY)–One ADR is worth 0.5 ordinary share.
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–One ADR is worth 0.5 ordinary share.
• Sonic Healthcare Ltd (ASX: SHL, OTC: SKHCF, ADR: SKHCY)–One ADR is worth one ordinary share.

Industrials

• Amcor Ltd (ASX: AMC, OTC: AMCRF, ADR: AMCRY)–One ADR is worth four ordinary shares.
• Boral Ltd (ASX: BLD, OTC: BOALF, ADR: BOALY)–One ADR is worth four ordinary shares.
• GWA Group Ltd (ASX: GWA, OTC: GWAXF, ADR: GWAXY)–One ADR is worth four ordinary shares.
• Toll Holdings Ltd (ASX: TOL, OTC: THKUF, ADR: THKUY)–One ADR is worth two ordinary shares.

Oil & Gas

• Beach Energy Ltd (ASX: BPT, OTC: BEPTF, ADR: BCHEY)–One ADR is worth 20 ordinary shares.
• Boart Longyear Ltd (ASX: BLY, OTC: BOARF, ADR: BLGPY)–One ADR is worth two ordinary shares.
• Caltex Australia Ltd (ASX: CTX, OTC: CTXAF, ADR: CTXAY)–One ADR is worth two ordinary shares.
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–One ADR is worth 10 ordinary shares.
• Santos Ltd (ASX: STO, OTC: STOSF, ADR: SSLTY)–One ADR is worth one ordinary share.
• Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY)–One ADR is worth one ordinary share.
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–One ADR represents one ordinary share.

Technology

• Redflex Holdings Ltd (ASX: RDF, OTC: RFLXF, ADR: RFLXY)–One ADR is worth eight ordinary shares.
• SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF, ADR: SMSUY)–One ADR is worth two ordinary shares.

Telecommunications  

• Singapore Telecommunications Ltd (Singapore: ST, ASX: SGT, OTC: SNGNF, ADR: SGAPY)–One ADR is worth 10 ordinary shares.
• Telecom Corp of New Zealand Ltd (ASX: TEL, NYSE: NZT)–One ADR is worth five ordinary shares.
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–One ADR is worth five ordinary shares.

Utilities

• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–One ADR is worth one ordinary share.
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–One ADR is worth one ordinary share.