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