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Finning Sees May Dividend Increase on Repair-Unit Profit

Finning International Inc. (FTT), the world’s largest dealer of Caterpillar Inc. (CAT) equipment, says it probably will boost its dividend as profit from the company’s service business bolsters the bottom line.

“It’s very reasonable to expect an increase in May” in Finning’s dividend, Chief Executive Officer Michael T. Waites said yesterday in an interview at the company’s Vancouver headquarters. “There is every reason to expect ongoing dividend growth -- good, solid dividend growth.”

Waites is trying to reassure investors after a 36 percent drop in Canadian fourth-quarter new-equipment sales and an 11 percent decline in its share price in the past 12 months. Companies in Canada, Finning’s biggest market by revenue, are cutting spending or delaying projects amid rising mining costs, while pipeline bottlenecks are depressing crude prices and cash flow among Alberta’s oil-sands producers, Waites said.

“I would expect people to be very cautious and drive productivity from existing operations,” Waites said. “We have a model which is seed, grow, harvest: You sell the machine, you seed the marketplace and you grow and harvest the parts business and rebuild.”

Some analysts are reserving judgment on Finning’s prospects.

Dividend Forecast

Maintenance and rebuilding services are in demand after an “explosion in new equipment sales” since 2010, particularly in mining, Yuri Lynk, a Montreal-based analyst at Canaccord Financial Inc. who rates the shares a buy, said yesterday by phone. Still, the company will need to increase new-equipment sales at some point to boost product services, Lynk said.

Finning has paid a dividend since 1998, according to its website. The company said Feb. 13 its board approved a quarterly dividend of 14 cents a share payable on March 14. Finning may increase it to 15 cents in May, according to data compiled by Bloomberg.

Finning rose 0.2 percent to C$25.76 at the close in Toronto, giving it a market value of C$4.43 billion ($4.33 billion). The shares have risen 4.8 percent this year, less than a 12 percent return on the 21-company Standard & Poor’s/TSX Industrials index.

Finning is targeting a consolidated profit margin from earnings before interest and taxes this year of 9 percent to 10 percent, more than the 8.4 percent it achieved in the fourth quarter, through improvements in all three of its major regions, Waites said.

Expanding Margins

In the U.K. and Ireland, Finning expects the margin to increase to as much as 8 percent from 5.6 percent and is targeting a margin of as much as 11 percent in South America, up from 9.7 percent at the end of last year, he said. In Canada the goal is to increase the margin to as much as 10 percent from about 7.2 percent, Waites said.

“Most of the opportunity is in Canada,” he said.

As of June 30, there were 1,539 Caterpillar vehicles ranging from 400-ton trucks to large graders operating in Alberta’s oil sands, according to a slide presentation on Finning’s website. The company forecasts sales of another 647 units through to 2017.

Waites said Finning’s profit margin on servicing and maintaining Caterpillar products for its customers in Canada is greater than from selling new equipment.

Lynk said new-equipment sales may rebound 11 percent in 2014 because of fleet replacement and recoveries in construction and mining after dropping an estimated 2.5 percent this year.

‘Very Resilient’

The services segment will help profit in 2013 and 2014, Lynk said. “Product services revenue is very resilient through different economic cycles,” he said.

Sara O’Brien, a Toronto-based analyst for Royal Bank of Canada who has the equivalent of a hold rating on Finning shares, said she’s not convinced Finning’s high expectations for services and maintenance are achievable this year.

“We are concerned that capital-expenditure budget cuts and project management in oil sands according to cash flow versus timelines has lessened demand in new and for high-margin overhaul business,” O’Brien said in a Feb. 13 note to clients.

While there is a temporary slowdown in countries such as China, long-term infrastructure needs in Asia will boost demand for copper, oil and coal, Waites said.

“There’s a strong base of demand,” Waites said. “We have to figure out how to pace with our customers.”

South America

Copper mining in South America, particularly in Chile, is “very strong,” Waites said. South America makes up a little more than a third of the company’s business, up from less than a quarter five years ago.

Finning’s fourth-quarter net income rose 49 percent to C$105.4 million, or 61 cents a share, from C$70.6 million, or 41 cents, a year earlier, the company said Feb. 13.

Finning’s operating profit in Canada improved in 2012 and the dealer has expanded product support for the oil-sands industry with the opening of a new service center in Fort McKay, which is “ramping up faster” than initially anticipated, Waites said.

“Our intention is staying up on the food chain,” Waites said. “We go up the food chain, beyond a commodity business.”

To contact the reporters on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net; Christopher Donville in Vancouver at cjdonville@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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