Canadian Pacific Falls as Buyback Fails to Soothe Investors

  • Expectations `were perhaps for a bigger' repurchase: analyst
  • CEO looks to reward shareholders after ending Norfolk pursuit

Canadian Pacific Railway Ltd. shares fell as plans to repurchase stock disappointed investors expecting a bigger payback following the railroad’s failed takeover attempt of Norfolk Southern Corp.

Hunter Harrison, the Canadian carrier’s chief executive officer, said repeatedly during the five-month public campaign for the U.S. rival that he probably would start repurchasing stock if the acquisition attempt ended, which it did last week. The board authorized repurchasing as many as 6.91 million common shares, the Calgary-based company said Wednesday in a statement.

“We sense expectations were perhaps for a larger buyback,” Fadi Chamoun, a BMO Capital Markets analyst in Toronto, said in a note to clients.

Canadian Pacific dropped 0.7 percent to close at C$188.57 in Toronto. The stock has gained 6.7 percent this year, less than a 6.9 percent advance of Canada’s benchmark Standard & Poor’s/TSX Composite Index.

Based on Tuesday’s closing price, a maximum buyback would cost the company about C$1.31 billion ($1.04 billion). Canada’s second-biggest railroad also unveiled plans to increase the quarterly dividend 43 percent to 50 Canadian cents a share.

Dividend Diversion

“CP seemed to be pursuing the all-buyback shareholder yield strategy, and now some of this money will be going to the dividend,” Stephen Paget, an analyst at FirstEnergy Capital, said in an interview. “They’ve clearly decided to go much more heavily on the dividend, which won’t be as accretive to the share price.”

Canadian Pacific abandoned the Norfolk Southern takeover attempt last week amid mounting opposition from shippers, U.S. politicians and rival railroads.

First-quarter revenue fell 4 percent to C$1.59 billion, missing the C$1.61 billion average of analyst estimates compiled by Bloomberg. Adjusted earnings rose to C$2.50 a share, beating the C$2.42 average of 24 estimates compiled by Bloomberg.

“We have established a solid foundation to build on, and we believe that the long-term outlook for CP remains strong,” Harrison said in Wednesday’s statement.

Efficiency Improves

Canadian Pacific’s operating ratio, a closely watched measure of railroad efficiency that compares expenses to revenue, dropped to a record 58.9 percent for the quarter -- an improvement of 4.3 percentage points from a year earlier.

“The 58.9, that’s not the ultimate,” Harrison said on a conference call. “If that’s our desire, to get as low as we can go, we can certainly get to the mid-fifties.”

Operating expenses fell 11 percent to C$938 million, paced by a 36 percent plunge in fuel costs to C$125 million and a 13 percent decline in compensation and benefits to C$329 million.

Average train speeds climbed 21 percent in the quarter to 23.5 miles per hour, while terminal dwell -- the length of time that railcars sit idle in yards -- fell 22 percent to 6.9 hours, according to a slide presentation posted on the company’s website.

Profit Outlook

A 2014 goal to double annual per-share profit by 2018 may be delayed a year, Chief Operating Officer Keith Creel said on the call. Economic conditions are “very demanding,” and quarterly profit will probably hit bottom this quarter before rebounding starting next quarter, he said.

“We still feel confident that we can, with a little bit of help from the economy, double our EPS. Maybe not in 2018, it might be 2019, but it’s certainly within the realm of possibility,” Creel said.

Creel remains on schedule to become CEO next year when Harrison’s contract expires, both men said Wednesday. Harrison, a former Canadian National Railway Co. CEO, was lured out of retirement in 2012 when activist investor Bill Ackman won a proxy fight to oust Fred Green after years of underperformance.

“It’s with mixed emotions that I am kind of looking at the twilight or end of my career,” said Harrison, 71. “I just wish I had a few more years ahead of me. I failed retirement once, and I can’t fail again.” While he may stay on as a Canadian Pacific director, Harrison ruled out becoming chairman.

“The chairman’s role is not my thing,” he said in an interview. “I would certainly assure Keith that I’m not going to be some hands-on board member fooling with his business all the time.”

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