Shareholders in some of corporate Canada’s biggest names received good news this week that richer dividend payments are on the way.
For non-investors, the payout hikes are also a sign that business confidence — and therefore potentially the economy— is improving.
On Friday, heavy equipment dealer Toromont fattened its payment to shareholders by nine per cent, capping off a week that saw industry heavyweights like Magna International (TSX:MG), Rogers Communications (TSX:RCI.B) and Tim Hortons (TSX:THI) announce double-digit dividend increases.
The moves come as corporate profits reach post-recession peaks, despite continued uncertainty about the global economic outlook.
Other companies boosting their dividends this week included Pan American Silver Corp. (TSX:PAA) and gold producer Alamos Gold (TSX:AGI), which followed earlier hikes by banks, miners and other companies.
About 31% of all companies listed on the TSX composite index had reported dividend increases as of earlier this week — and with the latest slew of hikes in the past few days, that figure is likely closer to 40%, said Peter Buchanan, an economist at CIBC World Markets.
“That’s the highest percentage in six years,” he said.
“It does suggest that firms are more comfortable with the outlook for earnings than they were in the third-quarter of last year … so that is certainly a plus for investment going forward.”
Fourth-quarter corporate profits were up nearly 14% from year-earlier levels, reaching their highest levels since the third quarter of 2008, noted TD Bank economist Dina Cover.
During 2011, business profits shot up 12.7% from those levels reported in 2010, she added.
And with profits strong in the mining, auto parts and other sectors of the economy, companies are opting to share their good fortunes with stockholders.
The increase in profitability comes even as the Canadian dollar rises, commodity prices drop and the threat of a potential global economic slowdown lingers.
“Looking ahead, businesses should continue to enjoy higher profits. Commodity prices have rebounded from their fourth quarter lows and the U.S. economy is holding up relatively well compared to expectations,” Cover said in her commentary.
But she warns that given some of the economic headwinds, profits are likely to expand at only about half the rate seen last year, which could signal reluctance to raise dividends.
“Still, risks relating to the debt crisis in Europe and the likelihood of a slowdown in global economic growth will create a challenging environment in which businesses operate.”
At Toromont, the dividend increase came after a solid jump in profits and sales that chairman and CEO Robert Ogilvie said make him optimistic about future growth.
“We have a strong balance sheet, we have confidence in our business and we are optimistic about our growth prospects.”
The equipment dealer’s fortunes are somewhat of a bellwether of the resource economy as miners and oil producers invest in new machines to grow their businesses.
And Magna’s 10% dividend hike is also good news for other manufacturers, especially in Ontario’s struggling auto sector, because it signals the industry is recovering and demand is returning.
It appears Canadian companies are moving more aggressively to pay out cash they’ve been holding on their balance sheets, both in dividend payments and share buy backs, while U.S. firms are moving in the opposite direction as they react more cautiously to the current environment, Buchanan added.
When a company raises its dividend, it’s a positive sign that they believe they can generate sufficient cash flow for years to come to meet that increase in payment, said Gareth Watson, vice-president of investment at GMP Securities.
But at the same time, stock returns have been dismal in the past year, and since the recession, and some companies may feel they need to return capital to shareholders through dividends as a way to reward investors for holding the stock.
It could also be a place for businesses to invest their cash if they cannot find a wise way to spend it in other areas in a slow economic environment.
The fourth-quarter is also a popular time for companies to raise their dividends on an annual basis.
“You could be the cynic and say ‘are companies raising their dividends just to make shareholders happy?’ Well you could put it that way,” Watson said.
But a dividend increase is nothing but a positive sign and Watson expects the hikes to continue in 2012.
“If management teams were really concerned about the economy, if they thought we were in a real lot of trouble, they would be wanting to conserve cash,” he said.
“They would not be hiking the dividend.”