BAY STREET-Canadian consumer firms keep tight grip on cash

* Wary of dividend increases, share buybacks

* Willing to wait out economic downturn

* Companies seen opting for growth

By Scott Anderson

TORONTO, March 14 (Reuters) - "Cash is king" has become the mantra for Canadian consumer companies looking to get through the coming year as they hold their purse strings tightly until the economic recovery becomes more firmly entrenched.

When times are good, companies often reward investors with hefty dividend increases or share buybacks, a tool that usually boosts stock valuations for investors.

But even though signs of recovery are abundant in Canada, many consumer companies aren't convinced the good times are necessarily here to stay. Most are giving big dividend increases a miss this year, waiting until they become more comfortable about sustaining the higher payouts.

That appears to be the thinking at food processor and grocer George Weston Ltd (WN.TO), which has some C$5 billion ($4.92 billion) to spend. Analysts say the company, which owns the Loblaw Cos (L.TO) supermarket chain, is more likely to reward shareholders with targeted acquisitions that would bring an immediate return, rather than mailing them a bigger dividend check.

Likewise, drugstore operator Jean Coutu (PJCa.TO) and T-shirt maker Gildan Activewear (GIL.TO) are expected to keep close tabs on their cash for the time being.

"Companies are a little bit hesitant to jump out there and raise dividends in this environment. They will hold off for a bit until they see if things improve," said Brian Yarbrough, an analyst at Edward Jones in St. Louis, Missouri.

"They don't want to get into a situation where they pay out a big dividend and then have another down year and are forced to cut or take on debt to pay it. Those are not good situations to be in."

Instead, retailers are seen opting for growth, with an eye for acquisitions that fit nicely with existing operations.

"There are acquisition opportunities out there," said Candice Williams, a retail analyst at Genuity Capital Markets in Vancouver. "A bunch of these companies believe that they have room for growth."

Analysts have a long list of ways for Weston to spend the cash it built up from the sale of two of its divisions. These include taking Loblaw private, making acquisitions in the grocery sector, or paying a special dividend to shareholders.

The company has long maintained it is keen on making acquisitions but it has not been able to find the right fit.

Yarbrough, one of five analysts with a "hold" rating on Weston stock, sees little movement in the share price until the company's strategy is better defined. Weston shares have risen just 8 percent this year.

"They are sitting on C$5 billion. It is not generating any return and, until they do something with it, how do you tell people they should buy something that is just a big thing of cash with no return?" Yarbrough said.

Montreal-based Gildan is viewed by analysts as at least a year away from hiking dividends or buying back shares. For now, it plans to use cash to expand its manufacturing plants in Central America.

Jean Coutu is likely to add more stores in its home turf of Quebec to fight off Shoppers Drug Mart (SC.TO), Canada's biggest pharmacy chain, which is eyeing the French-speaking province for its growing prescription sales.

Meanwhile, Tim Hortons (THI.TO), the iconic Canadian coffee and doughnut chain, is bucking the trend. Last month, it boosted its dividend by 30 percent and unveiled plans to open another 900 restaurants in North America.

Tim's, which has returned an estimated C$1 billion to shareholders since its 2006 initial public offering, has stayed true to its promise of returning 30 percent to 35 percent of its net earnings in dividends to shareholders.

Even when the economic tide does turn, it is not a given that retailers will look to dividend payouts, as they weigh the benefits of remaining a growth stock with higher price/earnings ratios, compared with the more steady dividend issuers with a lower multiples.

"The concern always is: as you stop growing your square footage your multiple can contract, and nobody appears willing to make that concession," Williams said.

Besides, not all investors are convinced that dividends are the best use of of corporate cash.

"As long as you are putting it to work, then investors are happy. You don't necessarily want the dividend," said Robert Gibson, head of research at Octagon Capital in Toronto.

"If you are reducing your debt that's good. As long as you are deploying your cash, I think investors are happy."

($1=$1.02 Canadian) (Reporting by Scott Anderson; editing by Frank McGurty)