Teamsters Canada Rail Conference

CN Rail boosted its quarterly dividend by 10 per cent today despite suffering a drop in fourth-quarter net profits to $573 million, mainly because of big gains in the year-earlier period.

The Montreal-based North American railway operator earned $1.21 per diluted share for the three months ended Dec. 31, including a $42 million tax recovery. Excluding this item, net income would have been $531 million or $1.12 per share.

That compared with a profit of $833 million, or $1.68 per share, in the same 2007 period when it had a $284 million tax recovery and a $64 million gain from the sale of its headquarters in Montreal.

As well, CN Rail (TSX: CNR) booked a $41 million gain on the sale of the English Welsh and Scottish Railway in the 2007 quarter.

Excluding these items, CN's adjusted 2007 fourth-quarter earnings were $444 million, or 90 cents per share.

Revenues in the final quarter of 2008 grew 13 per cent to $2.2 billion.

The results beat analyst expectation. A survey of Thomson Financial had forecast an adjusted EPS of $1.01 and $2.04 billion in revenues.

North American railways endured a dramatic dropoff in volumes starting in October and sustaining through December, ranging between 6.9 per cent for Burlington Northern to 11.3 per cent for Union Pacific.

CN's volume was down 9.8 per cent.

Chief executive Hunter Harrison said the railway turned in a solid fourth-quarter performance despite significantly lower volumes.

However, two factors acted as shock absorbers, offsetting the impact of weaker volumes on the company's bottom line, Harrison said.

One was the falling value of the Canadian dollar, which helped boost the value of U.S. business when translated into Canadian dollars. The second was the two-month lag in CN's fuel surcharge catching up to lower fuel prices.

"The North American economy is in recession, and we do not know how long or deep it will be," Harrison said after stock markets closed today.

"And, although overall freight demand is much weaker, the basic driver of our business – demand for reliable, efficient, cost-effective transportation – remains intact. To meet our long-term objectives, we will continue to maintain pricing discipline and pursue opportunities that extend beyond business-cycle considerations."

Looking ahead, Harrison said the railway will "do what's necessary to manage our assets and costs effectively in response to lower traffic volumes."

That suggests some cost cutting may be on the way as CN copes with a tough business environment.

"CN, as one of the rail industry's most efficient operators, is well positioned to face the challenges of the current economic environment, and we are committed to making additional productivity improvements," Harrison said.

CN results were released after the close of stock trading today. Earlier, CN shares rose 55 cents to $39.95 on the TSX.