Metro expected to hike dividend despite feeling pinch from weather, competition

MONTREAL - Metro is expected to increase its dividend for a 20th consecutive year this week despite facing ongoing challenges from intense competition, weather-related disruptions and slowing earnings growth.

The Canadian supermarket and pharmacy operator traditionally raises its quarterly dividend in the new year and this year's hike could raise the payout by perhaps 24 per cent, or six cents, to 31 cents per share, say industry observers.

A double-digit increase would mark the sixth consecutive year is has done so and follow a 16.3 per cent boost last year.

Irene Nattel of RBC Capital Markets expects the increase will come in at about 10 per cent, raising quarterly the payout to 27 or 28 cents per share, while Michael Van Aelst of TD Securities is more bullish at 31 cents.

Nattel also anticipates that the Montreal-based company will institute a special program to repurchase 10.7 million of its shares for $800 million over the next year that would raise next year's earnings per share by 10 per cent and bolster its share price.

That's on top of a normal course issuer bid that has been used to reduce the number of Metro shares by 22 per cent over the last seven years.

The Montreal-based company has used the program to raise its value in the absence of acquisitions or large growth opportunities that would require it to reinvest in the business.

Van Aelst said Metro could instead offset intensifying competitive pressures by investing in an automated distribution centre or IT to improve efficiencies.

"While it has a good track record in this area, the payoff for shareholders would take longer to materialize," he wrote in a report.

Metro's (TSX:MRU) dividend and share repurchase efforts could be announced Tuesday amid the release of what is expected to be weaker results in the first quarter of its fiscal year.

Revenues are expected to have dropped drop 1.3 per cent to $2.67 billion for the period ended Dec. 21, according to analysts polled by Thomson Reuters. Adjusted profits were forecast to slip one cent to $1.15 per share while pre-tax operating income (EBITDA) was expected to be down 5.8 per cent to $177.3 million.

"The combination of ongoing competitive intensity, very modest food inflation and weather-related disruptions over the holiday season are anticipated to pressure operating earnings through the first half of fiscal 2014," Nattel wrote in a report.

Perry Caicco of CIBC World Markets estimates that same-store sales will slip by 1.5 per cent driven by a one per cent drop in food prices. But Van Aelst and Nattle both expect same-store sales will decrease by up to 2.5 per cent. Insurance coverage for power failures should partially offset the inpact on profits.

Several retailers, including Dollarama (TSX:DOL), have warned investors about the financial impact of temporary store closures amid storms and power outages in Eastern Canada.

Dollarama said its same-store sales in the busiest month of the year were down 7.5 per cent from a year earlier, largely offsetting an 8.4 per cent increase in November.

Although food retailers are typically less impacted than other retailers, the timing of the weather problems should carry over into the second quarter, said Nattel.

In addition to weather, the chain faces heightened competition, particularly in Ontario, from supermarket rivals such as Loblaws (TSX:L) and Sobeys (TSX:EMP), while its discount banner Food Basics is fending off expansion by Walmart (NYSE:TGT) and the first wave of openings by U.S. retailer Target.

Metro also faces pressure to expand its reach following recent deals by Loblaw's to purchase Shoppers Drug Mart (TSX:SC) and Sobeys to buy Safeway Canada based in Western Canada.

"It will have to fight hard, and possibly invest more materially in promotions and lower prices, in order to turn same-store tonnage and operating profit positive over the coming year," said Van Aelst, who predicted single-digit earnings growth over the next few years.

He added Metro's reduced ownership in Alimentation Couche-Tard (TSX:ATD.B) should make it tougher to achieve its traditional double-digit EPS growth.

Metro is Quebec's leading grocery chain with nearly 34 per cent market share. It has more than 65,000 employees in Quebec and Ontario, with more than 600 food stores under several banners including Metro, Metro Plus, GP, Super C and Food Basics, as well as over 250 drugstores under the Brunet, Brunet Plus, Clini Plus, The Pharmacy and Drug Basics banners.

On the Toronto Stock Exchange, Metro's shares closed at $63.50 on Friday, down $1.19 amid a major sell-off on North American markets.