Editor’s Note: Please see our analysis of the latest news from our Dividend Champions in the Portfolio Update section following the article below.

“You campaign in poetry. You govern in prose.”

That phrase, famously uttered by New York governor Mario Cuomo in 1985, has particular resonance in the oil-rich province of Alberta these days.

For the province’s left-leaning New Democratic Party (NDP), the “poetry” part came during last spring’s provincial election. On the campaign trail, it went after the 44-year-old Progressive Conservative (PC) government on two key fronts: what the NDP saw as weak climate change policies and the PCs refusal to review royalty rates—what the province charges companies for the right to extract crude.

There was no question about where the NDP stood on the latter point. Here’s what its platform said: “The PCs have refused to implement realistic oil royalties that the people who own the resources—all of us—deserve.”

It was tough talk in a province where the energy sector generated C$111.7 billion of revenue in 2014, with 60% of that coming from the oil sands. In all, money collected from oil sands royalties paid more than 10% of the province’s operating costs in the 2014-15 fiscal year.

In a result no one saw coming, the May 5, 2015, vote catapulted the NDP to power for the first time in Alberta’s history. The party captured 54 seats in the 87-seat legislature, up from just four before the election call. The Conservatives fell to 10 seats from 70.

A Royal Pain

The problem? For the NDP, the “prose” part—or the messy business of running the province—came at a time when the Alberta oil industry was in freefall.

The numbers are grim: the Canadian Association of Petroleum Producers estimates that 100,000 jobs directly and indirectly related to energy have been lost since oil prices started to nosedive in mid-2014. Industry capital spending dropped from C$81 billion in 2014 to around C$45 billion last year.

That pushed up the provincial unemployment rate to 7.4% in January from 4.4% in November 2014. Alberta’s economy also contracted by about 1.3% in 2015, according to RBC, and the bank only expects it to eke out 0.9% growth this year, compared to 2.2% for Canada as a whole.

Even so, the NDP went ahead with plans to hike corporate tax rates to 12% from 10%, impose stricter limits on carbon emissions in the oil sands and bring in an economy-wide carbon tax, starting in 2017.

But royalties were the issue that caused the most anxiety in Calgary’s glass towers—and the NDP’s earlier stand on the file did nothing to quell these fears. The government created a four-member panel to look into the matter last August.

Before we go further, here’s a quick look at how Alberta’s oil sands royalty regime works. First, it’s important to note that the province, not the federal government, owns 81% of Alberta’s mineral rights.

Right now, royalty rates range from 1% to 9% of an oil sands producer’s gross revenue, depending on the price of crude, until a project has recouped its start-up costs. Once that hurdle is cleared, royalties are derived from net revenue in a range from 25% to 40%, again depending on the price of oil.

The NDP Changes Course

Thankfully, the NDP took the opportunity to show that it has a pragmatic streak when it comes to the province’s golden goose.

When the report was released on Jan. 29, it recommended few changes. Oil sands rates were left at current levels, while other oil and gas projects will shift to a similar model as the oil sands, with a 5% royalty applying until a project recoups its costs, and a higher rate thereafter.

Premier Rachel Notley accepted the findings, going as far as to say that due to the oil-price plunge, “times have changed,” and now was not the right time for a “money grab.”

The oil patch, too, was largely onside, apart from concern about the uncertainty the review process caused. “Today’s announcement has been the result of a fair and credible process, one Albertans can trust,” said Tim McMillan, president of the Canadian Association of Petroleum Producers.

It’s not the first time the NDP has taken a co-operative approach with the energy sector.

As my colleague Ari Charney noted in December, the government’s climate change strategy, drafted after consultations with oil producers like Canadian Natural Resources, Shell Canada, Cenovus Energy and Dividend Champion Suncor Energy (TSX: SU, NYSE: SU), caps carbon emissions from the oil sands at 100 megatonnes a year, up from 70 now.

That leaves some room for growth, with estimates that the cap would allow an additional 1 million barrels per day of oil sands production, up from 2.3 million in 2014. The heads of all four companies were on stage when Notley made the announcement.

From Payments to Pipelines

Notley’s climate change plan also gave Ontario premier Kathleen Wynne some cover to tentatively back the Energy East pipeline proposed by Dividend Champion TransCanada Corp. (TSX: TRP, NYSE: TRP). Energy East would stretch 2,860 miles from Alberta and Saskatchewan to refineries in New Brunswick. Along the way, it would traverse Manitoba, Ontario and Quebec.

However, the 1.1-million-barrel-a-day line still faces strong opposition, including from a group of Montreal-area mayors who aggressively came out against the project on January 20.

To be sure, Energy East still has a long way to go, and it will be Canada’s independent National Energy Board that will have the final say. One thing working in TransCanada’s favor is the fact that most of the line already exists: it uses 1,865 miles of gas line the company will convert to carry oil. Only 995 miles will be new pipe.

If TransCanada gets the thumbs-up, it plans to have Energy East up and running by 2020.

The Dividend Champions: Portfolio Update

By Deon Vernooy

TMX Group Ltd. (TSX: X, OTC: TMXXF) delivered weak results for the final quarter of 2015 with adjusted earnings per share declining by 6% compared to the same quarter the previous year and 5% for the full year. The quarterly dividend was held unchanged at C$0.40 per share and the full year dividend amounted to C$1.60 per share, the same as in 2014.

The downbeat results were not unexpected as the company is ultimately dependent on market conditions for generating fees from it trading platforms and information services. The cyclical downturn in commodity prices also makes raising capital by the large complement of resource-producing companies listed on the Toronto Stock Exchange difficult.

TMX Group also announced a non cash impairment charge related to acquisitions booked in 2012 close to a peak in the commodity markets. A special strategic alignment charge of C$23 million (mainly severance costs) was also incorporated in the annual results. Although neither of the charges are included in earnings described above, as it has no bearing on the ongoing profitability of the business it does reflect in the balance sheet of the company and resulted in a 4% decline in the equity value of the business over the course of 2015.

Despite the tough trading environment, cash flow remained very strong with an operating cash conversion ratio similar to the highly cash generative telecommunications companies. The balance sheet is almost unlevered with a debt to capital ratio of less than 10%.

The coming year may shape up to be another difficult year for TMX as the resources sector continues to struggle. However, the strategic plan of the new CEO is a work in progress and will hopefully start to show positive results in the second half of 2016 and 2017.

Meanwhile the stock is inexpensive relative to its peers (now one of the cheapest stock exchanges in the world) and the very sustainable dividend is yielding over 4%. This, combined with the weak Canadian dollar may make it an attractive target for a potential acquisition by a foreign entity. We estimate the fair value at C$44/US$31.

ManuLife (TSX: MFC, NYSE: MFC) reported a 15% quarterly increase in core earnings per share (which excludes investment gains) and a 12% gain for the full year. The dividend was raised again and is now 19% higher than last year.

The Asian, Canadian and wealth management operations reported strong profit growth while the U.S division lagged citing new business strain as the main reason. The weaker Canadian dollar helped the reported growth along although constant currency growth was also solid.

Premiums and deposits jumped by 32% in constant currency during the quarter reflecting strong growth in the Asian markets, US mutual funds, US retirement services and Canadian institutional markets. Insurance sales were up by 18% while wealth management had a 64% increase in new inflows.

Profit guidance provided by company management was weaker than expected by market analysts resulting in a sharp selloff in the stock after the results announcement.

The company trades on an attractive 4.3% dividend yield and below book value. We estimate fair value at C$22/US16.

The headlines of the Telus Corp. (TSX:T, NYSE: TU) quarterly results did not make for pleasant reading with earnings per share down by 14% compared to the previous year. However, sifting through the details provided comfort that the company was holding its own in a difficult operating environment.

Adjusted for restructuring and other one-off costs, quarterly earnings per share was actually 4% higher while the dividend was increased by 10%. In our view this more realistically reflects the true underlying performance of the business.

The two core operating divisions, wireline and wireless reported adjusted quarterly EBITDA growth of 8.2% and 2.8% respectively. Key operating statistics confirmed secular trends of a decline in residential landline connections while growth areas such as mobile data usage and high speed internet connections continue to leap ahead.

Capital expenditures on what the company calls “generational investments” (additional wireless spectrum license purchases, fibre optic and 4G LTE network improvements), continued at an elevated level measuring C$4.5 billion in 2015. While Telus has a good record of spending capital wisely, this effort combined with share repurchases and the increased dividend resulted in a 27% increase in the debt load to C$11.9 billion. The debt/capital ratio is now 61% which is at the upper level of our comfort zone.

Management expects 2016 earnings per share to increase between 5% to 12% and has previously indicated that it intends to grow the dividend by 10% per year until 2016. Telus targets a pay-out ratio of 65%-75% of adjusted earnings per share with the most recent ratio close to the upper limit at 73%.

Given the elevated debt levels and ongoing-large capital expenditures, we will not be overly surprised to see the Board guiding to lower dividend growth beyond 2016 and also lower or discontinue the ongoing share repurchases.

The 2016 dividend yield on the stock is 4.5% and other valuation measures indicate a reasonable valuation. We estimate the fair value on the stock at C$46/US$33.

TransCanada Corp. (TSX: TRP, NYSE:TRP) reported fourth quarter operating earnings per share 11% lower than the year before. For the full year the operating earnings increased by 2.5%. The dividend per share was raised by 9%.

A sizeable C$2.9 billion write down was also taken regarding the shelving of the Keystone XL project which resulted in an accounting loss of $1.2 billion for the full year.

The pipelines division fared well during the final quarter of the 2015 financial year with a 15% increase in EBIT compared to same quarter the previous year. The Canadian natural gas pipeline division held profits unchanged but the U.S. ANR Southeast mainline provided a profit boost with excellent results. The energy division fared less well will a 39% decline in EBIT mainly as a result of lower profits on the Canadian power section.

The balance sheet remains fully leveraged with a debt to capital ratio of 66% but operating cash flow remains adequate to support the dividend, some share repurchases and maintenance capital. However, shortfall to fund ongoing expansion will have to be funded with additional debt, equity or asset sales to TC Pipelines or other parties.

For 2016, management expects to achieve higher profits supported by new pipelines in Mexico starting to contribute to profits, the higher investment base for the NGTL system and some cost savings as a result of a corporate reorganisation. The dividend is indicated to grow between 8-10% per year until 2020.

The dividend yield on the stock is 4.6% and we estimate the fair value at C$49/US$35.