Canadian National Boosts Buyback After Earnings Miss

Canadian National Railway Co. plans to buy back more shares, spending as much as C$1.7 billion ($1.5 billion), after posting third-quarter profit that missed analysts’ estimates.

The effort to return cash to shareholders follows a 25 percent surge in the stock price this year. Canadian National reported earnings yesterday that were held back by a jump in costs associated with stock-based compensation, the same issue cited by smaller rival Canadian Pacific Railway Ltd. in its results, which also trailed analysts’ projections.

Canadian National’s quarterly dividend, now at 25 Canadian cents a share, is under review and an announcement will be made in three months, Chief Financial Officer Luc Jobin said yesterday on a conference call. The company may increase it by 20 percent to 30 cents, according to data compiled by Bloomberg.

“CN seems ready to increase its payout ratio,” Benoit Poirier, an analyst at Desjardins Capital Markets who advises investors to buy Canadian National shares, said today in a note to clients. The railroad can probably sustain an annual dividend growth rate of 20 percent in the next two years, he said.

Earnings excluding some costs and gains rose 21 percent to C$1.04 a share, missing the average estimate of C$1.05 in a Bloomberg survey of 27 analysts. Net income increased by the same amount to C$853 million while revenue advanced 16 percent to C$3.12 billion, the Montreal-based company said yesterday in a statement after the close in Toronto. Analysts projected C$3.13 billion.

‘Strong Revenue’

The company followed Canadian Pacific, which reported a 23 percent increase in profit yesterday. The two carriers are the top performers on the Canadian industrial’s sub-index this year.

Canadian National fell 0.7 percent to C$75.18 at the close in Toronto amid a 1.6 percent decline in the benchmark Standard & Poor’s/TSX Composite Index. Canadian Pacific dropped 1.5 percent to C$221.16.

The bigger railroad paid out C$61 million in stock-based compensation during the third quarter, more than double the amount in the same period a year earlier.

The buyback plan “will lend support to the shares,” Jim Corridore, an analyst at Standard & Poor’s Capital IQ, said in a note to clients. “We remain positive on carloadings and expect Canadian National to continue to see strong revenue momentum.”

The company said it will repurchase as much as 3.9 percent of the stock outstanding. It will probably devote C$1.7 billion to the new buyback program after spending C$1.4 billion in 2013-2014, Jobin said on the conference call.

The railroad is reviewing its dividend policy, and will provide an update in January, Jobin also said.

‘Eminently Doable’

“Our discussion with the board is very productive, and should make our shareholders happy,” he said without being specific.

Operating ratio, a widely watched measure of railroad efficiency, improved to 58.8 percent from 59.8 percent a year earlier. Canadian National will probably finish the year with a “record” operating ratio, Chief Executive Officer Claude Mongeau said on the call.

Through the first nine months of 2014, Canadian National’s operating ratio stands at 62.3 percent, and a full-year ratio in “the low sixties is eminently doable,” Jobin said.

Canadian Pacific yesterday reported an operating ratio of 62.8 percent for the third quarter.

Canadian National reiterated a July prediction for a “solid double-digit” increase in annual earnings per share from last year’s C$3.06. The company has previously said it was aiming for earnings growth of at least 10 percent.

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