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Tim Hortons may serve up dividend hike despite troubling sales trends

A Tim Hortons employee grabs a doughnut for a customer.

© JP Moczulski / Reuters/REUTERS

Inside the Market's roundup of some of today's key analyst actions

Tim Hortons Inc. is likely to boost its dividend Thursday morning as it releases its latest quarterly results. But that may mask some troubling trends at Canada's dominant coffee chain that could limit further gains in its stock price.

The main concern: same-store sales growth has been slowing of late and the fourth-quarter likely saw little improvement.

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RBC Dominion Securities analyst Irene Nattel today cut her price target on Tim's shares by $4 to $54, while reiterating a "sector perform" rating.

She expects fourth-quarter 2012 same-store sale growth of 2.0 per cent in Canada, which is in line with growth in the second and third quarters of last year – but down from average growth of 3.6 per cent in the comparable fourth quarter period of 2011.

And that modest same-store sales growth is likely to be driven by a shift toward higher-priced items, rather than more customers coming through its doors.

"Decelerating customer counts during Q3 likely continued into Q4, a trend consistent across virtually all retailers in our universe of coverage, as budget-squeezed consumers cut back on shopping trips and discretionary expenditures," Ms. Nattel wrote in a research note. "And for THI, which is deeply embedded in small communities and regions/markets among the most economically depressed in Canada, the impact is magnified. In addition, the return of more normal early winter weather patterns in 2012 also likely moderated traffic, a trend which we anticipate continues in 2013."

For 2013, she anticipates only modest average same-store sale growth of 1.9 per cent.

Canaccord Genuity analyst Derek Dley echoed similar concerns today as he reiterated a "hold" rating and $51 price target.

"We believe the recent negative transaction growth in Canada points to an increasingly saturated market, and as such, believe shares of Tim Hortons are fully valued," Mr. Dley said. "After two consecutive quarters of negative traffic growth in Canada, we believe investors are anxiously awaiting a return to growth; however, consumer spending remained weak in Q4, and we are forecasting 2.5 per cent same-store sales in Canada, driven by price increases, and 3.0 per cent same-store sales growth in the U.S.," he said.

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Nonetheless, both analysts believe Tims will boost its dividend – Mr. Dley sees a 19 per cent hike to $1 per share annually. And they expect earnings per share to be up from a year earlier. The average analyst estimate is for earnings per share of 72 cents, ahead of 65 cents a year earlier.


Industrial Alliance Insurance & Financial Services Inc. reported better-than-expected core earnings, which "reflect lower earnings strain, better policyholder experience and strong investment results," said Canaccord Genuity analyst Mario Mendonca.

The insurer's capital and surplus requirements cover it "against substantial deterioration in equity markets and interest rates, while the company's greater sensitivity to the macro factors should lead to greater-than-peer positive earnings revisions if the macro environment remains strong," he wrote in a research note.

"Additionally, we believe that IAG has the best leverage to one of the more important themes in the industry at this time – the capacity to manage new business strain lower. Ultimately, we believe these factors should allow IAG to generate noticeably better EPS growth than its larger peers. Finally, we believe IAG may be in a position to raise the dividend by late 2013, and currently trades at a discount to Manulife Financial Corp. and Sun Life Financial Inc. on our estimates."

Upside : Mr. Mendonca raised his target price to $42.00 from $38.00 and rates the stock "buy."

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Fortress Paper Ltd.'s stock price reflects "the point of maximum pessimism," with a spate of negative news in recent weeks priced in, said Raymond James analyst Daryl Swetlishoff.

The paper maker faces setbacks and cost overruns at its Thurso facility, a Chinese anti-dumping probe and liquidity concerns, the analyst said, but the company also hired a new president of dissolving pulp operations – "a positive development in our view given the profound operational challenges at the Thurso mill."

Upside : Mr. Swetlishoff upgraded Fortress to "outperform," citing its sliding stock price, and expects better fourth-quarter earnings, stronger commodity prices and potential asset sales. His price target on the stock is $11.


Brookfield Asset Management Inc. is about to spin off its Brookfield Properties Partners unit, which would give the company three public managed partnerships owning most of its operations and generating increasing asset-management fees, noted Desjardins Securities analyst Michael Goldberg.

"BAM is well positioned to benefit from the nascent U.S. housing recovery and from continued distress in Europe," Mr. Goldberg wrote in a research note.

"BAM was active in Europe in 2012, especially in helping European companies dispose of assets to recapitalize their balance sheets. BAM expects this type of activity to continue in 2013 as European companies look to facilitate the sale of assets in other markets to strengthen their liquidity and capital and allow them to refocus on their home markets."

Upside: Mr. Goldberg ranks Brookfield Asset Management as his "top pick," and raised his price target to $44 (U.S.) from $42.


Kinross Gold Corp. has excellent leverage to gold prices, with every $100 (U.S.) an ounce move in the commodity impacting earnings per share by 11 per cent, said RBC Dominion Securities analyst Stephen D. Walker.

While that provides the producer with the potential to outperform rivals, he also notes that higher operating costs, no near-term development projects and a decline in value of some of its projects will limit the stock's gains.

Upside: Mr. Walker cut his price target by $3 to $11 while reiterating his "outperform - above average risk" rating.


For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities

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Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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