Earnings season for the calendar fourth quarter is currently underway, and several of our Dividend Champions have already announced their results. Below, we cover the highlights of the first group of companies that have reported.

Staying on the Rails

Canadian National Railway Co. (TSX: CNR, NYSE: CNI) reported slightly higher fourth-quarter profits, as freight volumes seem to have finally turned the corner. Earnings per share grew 4% year over year, and the board boosted the company’s quarterly dividend by 10%.

Revenue increased by 2% thanks to higher carload volumes, while a 2.7% freight-rate increase helped drive profits. Commodity-related cargo volumes (i.e., coal, crude oil, and metals) declined, while grains, fertilizer, and intermodal fared better.

Operating expenses, up by 1%, were well contained, given the weak but improving operating environment. The key operating ratio (operating expenses as a portion of revenue) declined to 56.6%. At the same time, tight cost management could become a tough hurdle in future quarters as it will become increasingly difficult to reduce costs even further.

A highlight for 2016 was the record level of free cash flow. This is one of the key strengths of the business and supports ongoing share repurchases and dividend increases. The balance sheet remains in excellent condition.

Management expects to see moderate volume growth in 2017, with earnings per share rising by mid-single digits.

Although the company raised its dividend by 10%, we were somewhat disappointed since the payout ratio as a percentage of free cash flow and earnings is still quite conservative.

Over the past two months, Canadian National’s share price has moved higher as investors anticipated an improving operating environment. We see some downside risks to this optimistic outlook, including tougher winter conditions than last year, higher energy costs, and a more difficult pricing environment.

Canadian National is a high-quality operator, but the company’s valuation remains full in absolute terms, with a premium valuation compared to its North American peers. The stock yields 1.8% on a forward basis, and we estimate its fair value at C$92, or US$70.

Steady As She Goes

BCE Inc. (TSX: BCE, NYSE: BCE), the top holding in our Dividend Champions Portfolio, delivered yet another steady quarter. Adjusted earnings per share grew 5.6% year over year, and the board boosted the quarterly dividend by 5.1%, to C$0.7175 per share.

Revenue increased marginally, and operating expenses were well contained, allowing adjusted EBITDA (earnings before interest, taxation, depreciation, and amortization) to climb 2.3%.

The wireless division remained the star performer, with a 5.1% rise in EBITDA as subscribers increased and paid more on average for the use of their devices. The average revenue per user increased by a stellar 4.7%, as the use of smartphones drove higher demand for data. Another remarkable achievement was the 23% net addition of highly profitable post-paid users.

The wireline division increased EBITDA by 0.9%, despite a small decline in revenue caused by a regulatory ruling that reduced wholesale Internet tariffs. The secular trends in the wireline division continued, with a decline in residential landline connections, while Internet connections increased by 4.8% for the year.

The balance sheet is reasonably levered, with a debt-to-capital ratio of 54%.

BCE continues to generate strong free cash flow, which was up 8% for the year. This has been one of the key factors driving the company’s consistent dividend growth.

Management forecasts a small improvement in revenue and profits in 2017, but expects the dividend to continue growing by 5% annually thanks to strong operating and free cash flow growth.

The C$4.2 billion acquisition of Manitoba Telecom Services (equivalent to 5% of BCE’s current enterprise value) is moving ahead as planned, though approvals from a government department and the competition commission are still pending. The transaction, which is expected to close by the end of the first quarter, will be paid in cash and shares of BCE, while a portion of post-paid wireless subscribers will be sold to Telus.

Management says the transaction will be accretive to cash flow, with $50 million in operational synergies and additional tax savings. BCE managed to extract considerable synergies from the Bell Alliant acquisition in 2014, and we would expect the same from this deal.

BCE’s valuation remains attractive in absolute terms, with a 12-month forward enterprise value to EBITDA ratio of just over 8 times. Shares of BCE currently yield 5.0% on a forward basis, and we estimate the stock’s fair value at C$71, or US$55.

Mexico’s New Friend?

Brookfield Infrastructure Partners LP (TSX: BIP-U, NYSE: BIP) reported fourth-quarter funds from operations per unit (FFO is an estimate of operating cash flow) grew 11% year over year. The board boosted the quarterly distribution per unit by 11.5% sequentially, to US$0.435.

For the full year, FFO per unit grew 14%. Transportation, which is the largest segment, posted a 6% increase in FFO, while Utilities, the second-largest division, increased FFO by 3%. But it was the Energy division that provided the real kicker, with FFO surging 66%.

During 2016, the business spent $850 million on growth initiatives in the Utilities and Transport businesses and has another $2.3 billion of capital investments lined up for the next two years.

BIP also made several acquisitions during the year, including the Australian ports business, Niska Gas Storage Partners, and toll roads in Peru and India.

The balance sheet is reasonably levered, with a debt-to-capital ratio of 57%, while the firm continues to enjoy an investment-grade credit rating from Standard & Poor’s. The partnership has about US$4 billion of liquidity available to finance growth and acquisitions.

Management expects double-digit profit growth in 2017, as both new and existing assets increase their contributions to profits.

Brookfield is a highly opportunistic investor that’s always on the prowl for new assets. To that end, CEO Sam Pollock says uncertainty about the Mexican economy along with a weakening peso could allow the firm to pick up high-quality assets at bargain prices there.

Brookfield’s units yield an attractive 5.0% on a forward basis, while the payout ratio, at 67% of free cash flow, is within the board’s targeted range. We estimate Brookfield’s fair value at C$51, or US$39.

Details regarding our Dividend Champions’ payouts are listed in the table on the following page.