Weston raising quarterly dividend amid lower profits compared with year ago

TORONTO – George Weston Ltd. (TSX:WN) is raising its quarterly dividend by about 5.6 per cent even though the bakery and grocery company’s profits were squeezed in the latest quarter and its Loblaws grocery division is cutting hundreds of jobs.

“As we anticipated, the third quarter of 0f 2012 continued to be challenging for both of the company’s operating segments,” Weston president Pavi Binning told a Tuesday conference call with analysts.

Nevertheless, Weston’s quarterly dividend will rise by two cents per share to 38 cents.

Asked if the increase signalled a change in Weston’s use of cash on the balance sheet, Binning said the dividend had been constant for quite a few years “and we felt it was now the right time to increase it but that does not have an impact on how we deploy the cash going forward.”

The Weston Foods bakery arm delivered improved results for the quarter with operating performance benefiting from lower input costs, Binning said, while noting that sales declined slightly as a result of softness in the bakery market.

“Loblaw saw an improvement in top line sales. However, as previously forecast, the company reported a decline in adjusted operating performance driven by investments in labour and incremental costs in IT and supply chains.”

Weston’s net earnings attributable to shareholders fell to $160 million or $1.14 per share in the 16 weeks ended Oct. 6. That’s down from $264 million or $1.94 per share of net earnings a year earlier.

The Toronto-based company fared better on adjusted earnings in the quarter but said 2012 full-year adjusted earnings will be down from last year. Adjusted earnings for the third quarter was equal to $1.49, up five cents from last year.

“The increase was primarily in income tax expense, partially offset by a decline in the operating performance of Loblaw Companies Ltd.,” the company said.

The quarter’s adjusted earnings beat a estimate compiled by Thomson Reuters. It called for adjusted earnings per share of $1.41 on revenue of $10.2 billion.

Weston said Loblaw’s lower operating performance was primarily due to higher labour and other operating costs and increased capital spending on information technology and supply chain. That was partially offset by increases in gross profit, foreign exchange gains and operating income at its Financial Services segment.

Subsequent to the end of the third quarter of 2012, Loblaw announced its plan to reduce a number of head office and administrative positions.

Focused primarily on management and office positions, the plan is expected to affect approximately 700 jobs. Loblaw expects to take an estimated charge of $60 million in the fourth quarter of 2012, reflecting the anticipated costs of the planned reductions.

The company said Loblaws will drag down its full-year adjusted earnings in 2012, while Weston Foods’ full-year sales will be slightly lower than 2011.

On the Toronto Stock Exchange, shares of George Weston were down 56 cents at $63.50 in late morning trading Tuesday.

Loblaw operates more than 1,000 stores across Canada under numerous banners, including Great Canadian Super Store, Provigo, No Frills and Atlantic Superstore.

A Weston spokesman said last Friday the company has no interest in acquiring the manufacturing assets or brand names of Texas-based Hostess Brands, which said it’s going out of business.

Hostess Brands has bakery operations across the United States but several of its brands are made for the Canadian market by other companies. Weston makes Wonder Bread in Canada, for instance.

Economists predict that food prices may grow by as much as four per cent next year as drought conditions in the U.S. are expected to inflate costs. And analysts have noted that food producers like Weston could face higher costs on their key ingredients, like flour and sugar.

Asked about the possibility of price increases, Weston executives said the company said it would “ideally” like to do something on that front by the second or third quarter of next year.

“Our objective would be to cover commodity cost increases and so we are currently working with our retail customers with a view to implementing a price increase for next year to cover the costs,” Binning said.

Analysts also asked about Weston’s representation with alternative retailers like Walmart and Costco and whether it hoped to grab some of the business with Target when it begins opening the first of about 135 Canadian stores .

Jairo Senise, president of the Weston Foods division, said it could not comment on specific negotiations because they were confidential.