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Fishing for a dividend stock with growth potential? High Liner Food Inc. could be a good catch.

Propelled by a trend toward healthy eating and an ambitious expansion strategy, the processor and marketer of frozen seafood has hiked its dividend seven times in the last three years, including an 11-per-cent increase in May. More increases are probably on the way, analysts say.

"This is a steady, defensive business that generates strong cash flow and has the potential for increasing dividends," Beacon Securities Ltd. analyst Michael Mills said in a recent note.

Based in Lunenburg, N.S., High Liner is best known for fish sticks and frozen fillets sold at supermarkets across Canada, but it is also a growing player in the United States and Mexico. Its retail brands include Fisher Boy, Mirabel, Sea Cuisine and Royal Sea, and it also markets its FPI, Viking and other seafood products to restaurants and institutions.

Even as the company grapples with rising costs and tight-fisted consumers, its record of expanding through acquisitions, launching new products and keeping costs under control positions it well for the future, analysts say.

In May, Mr. Mills raised his earnings estimates "rather dramatically" and upgraded his rating to "buy" from "hold" after High Liner posted first-quarter results that sailed past expectations. He has a 12-month price target of $18 on the stock – 19 per cent higher than Thursday's close of $15.10 – and expects a 10-per-cent dividend increase in 2012, "which could prove to be conservative."

Certainly, the company could afford to boost its dividend. High Liner's current 40-cent annual dividend represents a yield of 2.4 per cent and a modest payout ratio of 22.4 per cent of estimated 2011 earnings.

High Liner's U.S. operations have been driving the company's growth, helped by product launches, expanded distribution and aggressive advertising campaigns. The recent acquisition of U.S.-based Viking Seafoods Inc., whose products are distributed to health-care facilities, schools and restaurants, also gave Higher Liner's U.S. results a lift.

The company is also looking to bolster its presence south of the border by potentially acquiring the U.S. operations of frozen seafood producer Icelandic Group, which put its U.S. and other assets on the block earlier this year.

The Flip Side

Still, not everything is going swimmingly for the company. At the retail level in particular, it is facing intense pricing pressures.

"It's a very tough environment. Every consumer is trying to get a deal and every retailer is trying to negotiate the best deal," Henry Demone, High Liner's president and chief executive officer, said in an interview. "We're trying to appeal to the hunt for value."

The company is fighting back with increased promotional activities and new "value-pack" products. At the premium end, it plans to introduce Fire Roasters flame-seared products in Canada later this year, after a successful U.S. launch in December.

High Liner is also facing higher costs for some fish species and for ingredients such as flour, soy and canola oil. Earlier this year, its wild Pacific salmon business suffered a big drop in sales after the company raised prices in response to higher costs. Salmon prices had spiked worldwide after Chile's harvest was devastated by a virus.

"We put up our prices, frankly not enough to cover the cost increases but too much for the consumer, and we had a big decrease in volume. We've adjusted and now we're seeing demand come back," Mr. Demone said.

"The consumer is very price sensitive and of course our customers, whether they be retail or food service, they feel that and they put pressure on us. So you feel that pressure right through the supply chain now," he said.

Caution

Given the uncertainties, some analysts remain cautious on the stock.

Carolyn Dennis of Dundee Securities Ltd. rates High Liner "neutral," meaning she expects its total returns – including dividends – to be in line with the overall market. She also rates the shares "high risk," largely because the common shares are relatively illiquid, trading an average of about 12,000 shares a day over the past 12 months. On many days, fewer than 1,000 shares change hands.

Her 12-month price target of $17 reflects a multiple of about 10 times estimated 2012 earnings.

Despite the challenges, Mr. Demone said High Liner sees a bright future. The company has invested heavily in technology to streamline production, eliminate waste and keep its labour and other costs down. And he's confident that, through a combination of strategic acquisitions and new products, it can continue growing. All of which suggests that investors could be reeling in more dividend hikes.

"I'm not going to promise dividend increases before they happen, but we feel very good about our business and we feel very good about the growth prospects," he said.

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