I often hear the debate about what is the better way for companies to reward their shareholders: dividend or buybacks. I have nothing new to add to this tired debate, but instead will ask, "why chose?" There are plenty of companies that do both!
Next week, I will take a look at some U.S. companies, but today I want to examine five Canadian companies that don't always get a lot of coverage here on Seeking Alpha. All of these companies have announced a large dividend increase and share buyback program this year.
Tim Hortons (THI)
In an article last year, I joked that the Canadian coffee behemoth was now generating so much free cash flow that they wouldn't know what to do with it all. Well, Tim Hortons has decided to put that cash to good use by rewarding shareholders. They announced an additional share repurchase program, which combined with last year's announced program will reduce outstanding shares in the company by a full 10%. Tim Horton's initiated a quarterly dividend of $0.06 in 2006, which has now grown to $0.21 per share.
Tim Hortons is not content simply to be a cash cow - they are actively working to grow their EPS. They are expanding their menu items, offering more expensive lattes and cappuccinos, as well as higher-end lunch items in an effort to increase their sales per customer. The company plans on opening new stores in Canada and is looking for opportunities for cost efficiencies among their operations. Finally, they are pursuing an aggressive growth strategy into the United States.
Canadian National Railroad (CNI)
Canadian National Railroad, North America's largest railroad, is the type of business I love: a wide economic moat, strong cash flow, pricing power and they have a monopoly in much of the Canadian market. The company is considered the model of railroad efficiency and should continue to perform strongly as Canada's vast natural resources are being developed.
Canadian National Railroad has not only been a great company but a great stock. They have consistently rewarded shareholders with buybacks and dividend increases. Even after 15 consecutive years of dividend growth, the company continues to hike their dividend aggressively, giving shareholders a generous 15% raise this year.
Magna International (MGA)
Magna International is a diversified global automotive supplier. Magna designs, develops and manufactures technologically advanced automotive systems, assemblies, modules and components. While the stock has been paying dividends for 19 years, the financial crisis and ensuing chaos in the auto industry hit Magna hard, and they were forced to break their dividend growth streak in 2008 and cut their dividend.
As a global leader in the automotive industry, Magna has rebounded in a big way. Their five year dividend growth rate has been over 24% annually - the dividend is now higher than their pre-recession levels - and the company has announced a share repurchase program. Investors wanting to play the rebound in the automotive industry should take a serious look at this shareholder-friendly company.
Nordion Inc (NDZ)
This small cap Canadian health care firm has recently restructured their business to focus on supplying medical isotopes, sterilization and radiation therapy products. The company does not own any reactors themselves, but instead enters into long care supply contracts with medical and research reactors.
This business model gives them a low cost of capital, a high return on invested capital and most earnings fall right down to free cash flow. Last year, the company initiated a generous dividend -- a 4.4% forward yield -- and followed up with an announced share buyback program this year.
A higher risk stock for sure but one that offers a nice pure play on the increasing importance of nuclear medicine. Company's management has indicated that the increasing cash flow they expect to bring in from their isotope business will passed along to shareholders through dividend increases.
Rogers Communication Inc (RCI)
Rogers Communications is a Canadian communications and media company, delivering cable television, internet and phone services. They also have interests in radio, television broadcasting, sports teams, sports arenas and magazines.
This is another cash cow with strong free cash flow, a high dividend yield and modest pay-out ratio that has plenty of room to keep hiking their dividend. An investor who bought in ten years ago would now enjoy a yield on cost of over 15%.
All of these companies have a few things in common: they are dominant players in their industry, have strong free cash flow and, most importantly, use their piles of cash to return value to shareholders. A company that hikes their dividend and reduces their share count by a few percent every year is very likely to be a long term winner.
A table with each company's forward dividend yield, one year dividend growth rate and share buyback as a percent of the outstanding float: