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(JOHN LEHMANN/JOHN LEHMANN/GLOBE AND MAIL)
(JOHN LEHMANN/JOHN LEHMANN/GLOBE AND MAIL)

Eye on Equities

Despite worries of a dividend cut, CanWel gets an upgrade Add to ...

Despite offering an attractive 10 per cent yield, CanWel Building Materials Group Ltd. hasn't given shareholders much to celebrate this year. Since topping out at $5.41 a share in early February, it's been on a steady slide, currently trading just above 52-week lows.

The national distributor in the Canadian building materials and related products sector has reported a weak first quarter, with a loss per share of 3 cents worse than Street estimates, and revenue similarly disappointing.

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Not surprisingly, its dividend is now under scrutiny. But Canaccord Genuity analyst Yuri Lynk suggests such an action isn't imminent. That's mostly because the second and third quarters are seasonally strong periods, and he expects lumber markets to improve as the year progresses and supplies tighten.

Still, he concedes buying CanWel is "not for the faint of heart."

Mr. Lynk believes that if lumber can average $245 (Canadian) per 1,000 board feet for the balance of 2011 - a reasonable assumption given that September and November lumber futures are trading at about $250 (U.S.) - CanWel should exit the year with a 113 per cent payout ratio.

"We believe the board will tolerate the temporarily high payout looking ahead to a stronger 2012," he said.

Upside: Mr. Lynk, who suggests the risks to the dividend are already reflected in the stock price, upgraded CanWel to a "buy" from a "hold" and reiterated a $5.50 (Canadian) price target.

Enerplus Corp. has agreed to sell 91,000 net acres of primarily non-operated land in the United States for $575-million (U.S.). TD Newcrest analyst Roger Serin notes that the oil and natural gas producer will now only be 8 per cent drawn on its $1-billion (Canadian) bank credit facility at the end of 2011. "This provides the flexibility to increase capital spending, make acquisitions and increased certainty in our view that its current dividend will be maintained," he said.

Upside: Mr. Serin raised his 12-month price target by $3 to $37 and upgraded the stock to a "buy" from a "hold."

Exchange Income Corp. reported a strong first quarter, with significantly higher revenue from its aviation and specialty manufacturing divisions, noted Raymond James Ltd. analyst Steve Hansen. He believes the company's handsome 7.2 per cent annual dividend is "both safe and secure," underpinned by a diversified base of cash flows, a modest payout ratio estimated at 56 per cent in 2011, and a solid balance sheet.

Upside: Mr. Hansen raised his six- to 12-month price target by $2 to $26 and Canaccord Genuity analyst Chris Bowes hiked his target by $2 to $24.25.

While Chartwell Seniors Housing REIT's Canadian retirement home operations are poised to deliver better results, the outlook for its U.S. operations is less certain as it is tied to the recovery of the U.S. housing market, said TD Newcrest analyst Jonathan Kelcher. Given that it trades at about 16 times estimated 2011 earnings before interest, taxes, depreciation and amortization, and has above-average leverage, "we believe Chartwell's valuation reflects expectations that are too optimistic," he said.

Downside: Mr. Kelcher raised his 12-month target price by 50 cents to $8, but reiterated his "reduce" recommendation.

Trinidad Drilling Ltd. has announced the renewal of contracts involving a significant portion of its U.S. fleet. CIBC World Markets Inc. analyst Jeff Fetterly believes several of the rig renewals were concluded at more favourable terms than when they were last renegotiated amid weak industry conditions in 2009. This, he suggests, will materially increase day rates and margins for the rigs.

Upside: Mr. Fetterly raised his price target by 50 cents to $13 and maintained his "sector outperformer" rating.

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