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INVESTMENT EDITOR

WHAT ARE WE LOOKING FOR?

Stocks that are most likely going to cut their dividends.

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REVIEW OF LAST MONTH

Yin Luo, quantitative strategist at Macquarie Securities, recommends a portfolio strategy each month for this column. For January, given the volatility in the market, he recommended a strategy to take advantage of the January effect, which says that small-cap stocks outperform. "More expensive, low-growth, poor-quality, small-cap and high-beta stocks outperformed in January over the past 20 years," he said. He therefore bet that most traditional quantitative factors (value, growth, quality and technical) would fail in January, with the exception of momentum and analyst sentiment. His recommended portfolio was a success, rising 2.7 per cent, while the S&P/TSX equity index fell 3.1 per cent. His portfolio beat the index by 5.8 per cent in the month. Since he started to contribute to the column, his strategy has outperformed the benchmark in 15 of 20 months.

THEME FOR THIS MONTH

Business is bad, credit is tight and that's forcing companies to cut their dividends - something that investors usually take badly. Mr. Luo set out this month to discover what factors help investors predict dividend cuts. He found that companies paying higher dividend yields (along with higher payout ratios), have a slower growth profile, negative short-term and mid-term price momentum, negative analyst sentiment, lower quality (lower profitability, higher distress risk and higher earnings dispersion), a smaller size, and a higher beta are more likely to cut their dividends. For this month, he recommends investors sell short a portfolio of U.S. stocks that are most likely to cut their dividends.

sadams@globeandmail.com

Dividend reduction candidates

Annual
US$ Price dividend Dividend Cut EMC2
Symbol Company name Sector Jan. 30 per share Probability** Decile*
1 AM-N American Greetings Consumer Discretionary 4.34 0.48 17.5% 1
2 BPOP-Q Popular Inc. Financials 2.74 0.32 14.9% 1
3 BNE-N Bowne & Co Industrials 2.80 0.22 22.1% 1
4 CTB-N Cooper Tire & Rubber Consumer Discretionary 4.67 0.42 15.2% 1
5 MI-N Marshall & Ilsley Corp. Financials 5.71 1.28 20.8% 1
6 MOD-N Modine Mfg. Consumer Discretionary 2.74 0.40 19.6% 1
7 PBY-N Pep Boys Consumer Discretionary 2.89 0.27 12.1% 1
8 AGM-N Federal Agric. Mortgage Financials 3.32 0.40 27.0% 1
9 OFG-N Oriental Financial Group Financials 5.05 0.56 15.0% 1
10 PBKS-Q Provident Bankshares Financials 6.42 0.44 19.4% 1
11 WHI-N W Holding Co. Financials 11.20 2.50 20.7% 1
12 TLB-N Talbots Inc. Consumer Discretionary 2.03 0.52 33.9% 1
13 HIG-N Hartford Financial Svc.Gp. Financials 13.16 1.28 25.3% 1
14 GVHR-Q Gevity HR Information Technology 2.01 0.20 19.7% 1
15 ARM-N ArvinMeritor Inc Consumer Discretionary 1.75 0.40 14.1% 1
16 FRP-N FairPoint Communications Telecommunication Services 2.73 1.03 16.4% 1
17 RF-N Regions Financial Corp. Financials 3.46 0.40 34.0% 2
18 XL-N XL Capital Financials 2.90 1.14 38.4% 2
19 RWT-N Redwood Trust Inc. Financials 12.69 3.00 23.8% 2
20 BANR-Q Banner Corp. Financials 3.15 0.20 13.6% 2
21 SAH-N Sonic Automotive Inc. Consumer Discretionary 2.03 0.48 19.2% 2
22 JNY-N Jones Apparel Group Consumer Discretionary 3.46 0.56 23.5% 3

* EMC{+2} is a proprietary multi-factor model to select stocks. Stocks are ranked into deciles based on their forecasted performance (10=the best)

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** Dividend reduction probability is based on a logit model, predicting the probability that a company may cut its dividend in the next 30 days.

SOURCE: MACQUARIE NORTH AMERICAN QUANTITATIVE RESEARCH

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