Canadian Pacific Raises Dividend – Analyst Blog

Canadian Pacific Railway Limited (CP), Canada’s second largest railway, announced an increase in its quarterly dividend as well as capital spending driven by improvements in economic condition, healthy balance sheet, strong earnings and free cash flows. The increase in dividend reflects that the trend of dividend growth is aligned with the earnings growth.

The company raised its quarterly dividend by 9% to 27 Canadian cents per share from 24.75 Canadian cents per share and is likely to be payable on July 26 to shareholders of record as of June 25, 2010. It also raised its capital spending by C$70 million ($66.9 million) and expects the total capital spending to be in the range of C$750 million ($716.9 million) to C$800 million ($764.7 million) for 2010.

The company’s cash position remains strong with approximately C$724 million ($695.8 million) and free cash flow of C$51 million ($49.0 million) at the end of the first quarter 2010. The company plans to repay 2010 debt in June from cash balances. We believe the company’s financial position continues to strengthen based on its productivity initiatives and good operating leverages when volumes return.

The company began to see some economic recovery along with continued strength in cost management. The first quarter 2010 earnings of Canadian Pacific beat the Zacks Consensus Estimate by 9 cents. Total revenue increased 5% to C$1.2 billion ($1.1 billion), due to a recovery in demand for commodities and automobiles.

Canadian Pacific currently has a high dividend yield of 2.0%, compared with its railroads peers – Canadian National Railway (CNI) and Union Pacific Corporation (UNP). Both the companies have a dividend yield of 1.7% and 1.6%, respectively.

We are currently maintaining an Outperform rating for Canadian Pacific. We expect 2010 to be a year of major bottom-line growth. The key drivers for growth include the company’s ability to melt coal, potash, and ethanol, intermodal recovery in Vancouver, coupled with continued strength in cost management and productivity improvements. The Zacks Consensus Estimate for the second quarter 2010 is currently 82 cents per share, up from 80 cents per share over one month.