Cash-rich Canadian companies embrace dividend strategy

Thu Feb 28, 2013 12:30pm EST

* Dividend hikes prevalent across the business spectrum

* Companies seek to boost their share prices

* Economic outlook makes payouts preferable to investing

* Trend seen continuing as cash stays on sidelines

By Andrea Hopkins

TORONTO, Feb 28 (Reuters) - Canadian companies of nearly every stripe have announced big dividend increases this year, aiming to dole out mountains of cash on a bet that shareholders prefer sweeter payouts to their throwing money at investments in an uncertain economy.

Bank of Montreal - Canada's No. 4 lender and the first of the big five banks out of the gate this year with quarterly financial results - set the tone for the lenders early this week with a surprise dividend increase.

But in the days before that, a swath of Canada's biggest names had already jumped on the dividend bandwagon. In telecoms, BCE Inc and Rogers Communications Inc raised payouts; in pipelines, TransCanada Corp and Enbridge Inc, and in retailing, Metro Inc and Tim Hortons Inc.

A host of others - Magna International Inc, Suncor Energy Inc and Telus Corp, to name three - are likely to raise their payouts or dividend targets or both sometime this year.

"Companies are swimming in cash," said Barry Schwartz, vice president and portfolio manager at Baskin Financial Services. "We've got a lot of mature companies in Canada that are unsure of their next steps, so instead of blowing it on bad acquisitions or doing dumb things, they pay it back to shareholders and they'll get rewarded with a higher stock price."

The trend is picking up steam in Canada because richer dividends are one of the best ways to attract and keep investors in the current investment climate. Stock prices are languishing, while low interest rates are forcing investors to search for yield.

Canada's two largest banks, Toronto-Dominion Bank and Royal Bank of Canada, on Thursday followed BMO's lead by jacking up their own payouts. Canadian Imperial Bank of Commerce did not, and paid the price, seeing its share price tumble in disappointment.

"The lack of an increase in the dividend, despite a less than 45 percent payout ratio, may dampen investors' enthusiasm as it may bring into question management's view of the sustainability of the current quarter's earnings," Barclays Capital analyst John Aiken said of CIBC's results.

CIBC shares dropped C$1.45 to C$82.43 even though the bank's quarterly profit came in above expectations.

LACKING CONFIDENCE

Bank of Canada Governor Mark Carney took Canadian companies to task last year for sitting on large amounts of cash, saying they should invest this "dead money" or return it to shareholders. For now at least, many are choosing the second path.

The alternative is decidedly less attractive for many. With economic uncertainty spread from Europe to the United States to China, companies are simply not confident enough to expand or invest, said John Kinsey, portfolio manager at Caldwell Securities Ltd.

Tim Hortons, the ubiquitous Canadian coffee shop chain, is "not going to open 3,000 more stores in Canada. So they are sitting in a lot of cash. Balance sheets are very strong, companies are cash flush, and they are cash-compounding machines," Schwartz said.

The rush to increase dividends is also underway in the United States, where the amount paid out in dividends is at a record, though the dividend yield is not.

Kinsey and Schwartz both said cash-rich companies there don't trust the economy, fear the U.S. budget wrangling, and want to do something to lure wary investors back to U.S. blue chips.

To be sure, that may change if stimulus measures in the United States and other countries finally succeed. But that doesn't solve the immediate problem of what to do with corporate cash.

"If the world economy starts to grow again, then I think some of this surplus cash will be used for expansion - new plant and equipment - that sort of thing," Kinsey said. "But as long as we're in this fix we're in, the trend will be to err on side of conservative and return the money to shareholders."

SEARCH FOR STEADY INCOME

Demographics is at play as well. With more boomers retiring and investors looking for steady income, stubbornly low yields on government bonds have sent investors to the stock market - but only to companies that prove themselves so confident and strong that they are raising their payouts.

"Any day you can buy a stock with a dividend yield higher the Treasury yield or the Canadian bond yield that's going to grow that dividend is a day you should own that stock," said Schwartz. "I don't know many bonds that can raise their payments to you every year."

Indeed, with 10-year Canada government bonds offering a paltry 1.853 percent yield right now, BMO's 4.6 percent dividend yield - before the hike has even taken effect - shines in comparison.

While companies are typically rewarded when the boost dividends or buy back shares - another way to return money to shareholders - investors also have an incentive to put their money where the dividend is: a tax credit on dividends paid by domestic companies.

"For people that use the money to live on, it is a very important factor because it is a quite substantial gross up," Kinsey said.

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