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Payout boosts Sears Canada stock, but analysts remain cautious

Sears Canada's flagship store at Toronto Eaton Centre. A special dividend is being financed from funds that the company is receiving from the sale of its leases on five stores, including this one.

Fernando Morales/The Globe and Mail

Investors are snapping up shares of Sears Canada Inc., but the excitement is more around the money the company is paying out than bringing in.

The stock closed up 6 per cent on Tuesday after the struggling department store chain announced a special $5-a-share dividend and hinted at another potential payout next year. The jump came despite a drop in third-quarter profit and revenue.

The dividend is being financed largely from the $400-million that Sears Canada is receiving from the sale of its leases on five stores in Ontario and British Columbia, including its flagship Eaton Centre location in Toronto.

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Another dividend payment could come early next year if the company closes the $315-million sale of its joint-venture interest in eight Quebec properties, expected in January.

Investors are looking at Sears Canada as a real estate play, rather than as a retailer, analysts say. But while the stock offers a way to cash in on the company's asset sales, the risk is considerable, especially in a difficult environment for retailers.

"Sears Canada remains a speculative situation," Desjardins Capital Markets retail analyst Keith Howlett said in a note on Tuesday. "The share price is sustained by the underlying value of owned real estate and below-market leases."

Sears Canada chief executive Doug Campbell argues the investor interest reflects not only the asset sales that led to the dividend but also the underlying strength in the company's third-quarter earnings.

Mr. Campbell points to lower costs and a 1.2-per-cent increase in sales at stores open for at least a year, the first such increase since 2008.

"That's a big win for us in the quarter," said Mr. Campbell, who took the top job in September, after joining as chief operating officer in early 2011. "I can unlock value by asset sales, but I can't create value unless I'm building the operations."

He said the company isn't considering any other asset sales at this time, nor is the board looking at paying a regular dividend.

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Analysts are still cautious on the stock.

"The challenge for Sears Canada is to reduce its infrastructure to fit its rapidly shrinking retail business," said Mr. Howlett, who has a "hold" on the stock and a $15 price target.

Sears Canada's shares jumped as much as 18 per cent to $19.89 on the Toronto Stock Exchange early Tuesday before closing up $1.07 to $17.87, a level not seen since mid-2011.

The share jump is good news for Edward Lampert, the U.S. hedge-fund manager who owns about 9 per cent of the stock and is also CEO and controlling shareholder of U.S.-based Sears Holdings Corp., which owns 51 per cent of Sears Canada.

Don Lato, president of Padlock Investment Management Inc., said he owns Sears Holdings "not because I think they're a great retailer," but because of the company's restructuring plans in the United States and Canada. Among other initiatives, the company is considering the sale of its Lands' End apparel business as well as its Sears automotive centres.

"It's more of the ongoing process of them realizing value from their assets as opposed to trying to fix the store," said Mr. Lato, who increased his position in Sears Holdings a couple of months ago and plans to hang on for a couple of years. "It's a high-risk, high-reward play. It's not one of my more traditional investments."

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John Stephenson, portfolio manager at First Asset Investment Management, isn't ready to wager on Sears Canada stock, despite the special dividend. "It's an interesting phenomenon short-term, but longer term you are still in retail, something that's in slow growth or in decline," he said.

Sears Canada is paying the $5 dividend on Dec. 6 to shareholders that own stock on Dec. 2. The potential for a follow-up dividend will be considered early next year.

Mr. Howlett expects the company to pay another dividend of $2 to $3 per share when it reports fourth-quarter results in February.

While the dividend is giving shareholders something to look forward to, the company's earnings were less attractive.

Sears Canada said it lost $48.8-million or 48 cents a share for the third quarter, compared with $21.9-million or 22 cents in the year-earlier period. The wider loss included severance and restructuring costs. Revenue dropped to $982.3-million from $1-billion.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More


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