* Same-store sales rise, traffic slips in Canadian shops
* Competition expected to weigh on same-store sales growth
* Quarterly dividend and dividend payout target raised
* Shares drop 3.5 percent on Toronto Stock Exchange
* Slowing growth profile in Canada disappoints, analyst says
By Allison Martell
TORONTO, Feb 21 (Reuters) - Tim Hortons Inc said on Thursday that customer traffic in its established Canadian coffee shops dropped for a third consecutive quarter, sending its shares lower even as the company boosted its quarterly dividend.
Analysts have been watching Tim Hortons' Canadian traffic closely, trying to gauge whether the chain can keep growing in its home market, where it is already a coast-to-coast fixture.
"We're seeing a slowing growth profile in Canada, a more competitive environment," said Canaccord Genuity analyst Derek Dley.
The problem is not just other chains, Dley said, but Tim Hortons' own steadily expanding footprint: "It appears as though they're eating into the profitability and the performance of their existing store base."
In Canada, same-store sales rose 2.6 percent in the fourth quarter to Dec. 30, despite the traffic decline, as customers spent more during each visit. Same-store sales in the United States grew 3.2 percent and transactions increased slightly.
The company said it expects first-quarter, same-store sales to grow at a slower pace than last year, when the metric rose 5.2 percent in Canada and 8.5 percent in the United States. It blamed the expected slowdown on weak economic conditions, stepped-up competition and unfavorable weather - but it did not elaborate about the weather's impact.
For 2013, it forecast earnings per share from $2.87 to $2.97. On average, analysts had been expecting earnings of $3.00, according to Thomson Reuters I/B/E/S.
Tim Hortons says it is responsible for eight of every 10 cups of coffee sold in Canada, but as it expands its food offerings, especially at lunch, it is increasingly going head to head with fast-food brands such as McDonald's Corp.
At the same time, McDonald's is challenging Tim Hortons' domain, promoting its coffee and remodeling its Canadian restaurants into something more coffee house than burger joint, with softer seating and even fireplaces in some outlets.
McDonald's Canadian chief told Reuters in October that his division is stepping up its expansion after holding back for more than five years.
Tim Hortons' shares fell 3.5 percent to C$49.01 in morning trading on the Toronto Stock Exchange.
ADJUSTED EARNINGS RISE
Fourth-quarter net income slipped to C$100.3 million ($98.84 million), or 65 Canadian cents a share, from C$103.0 million, or 65 Canadian cents, a year earlier. Earnings per share were boosted by share buybacks.
Costs associated with a corporate reorganization announced last year reduced earnings per share by about 5 Canadian cents. Excluding those costs and other non-operating items, adjusted operating income rose 4.4 percent to C$157.4 million.
Analysts, on average, had been expecting earnings of 71 Canadian cents a share.
Revenue rose 4.1 percent to C$811.6 million, weaker than the consensus forecast of C$829.5 million.
DIVIDEND TARGET UP
The company boosted its dividend to 26 Canadian cents a share from 21 Canadian cents and said its board has approved a higher payout target.
Tim Hortons will aim to pay out between 35 percent and 40 percent of the prior year's normalized net income, up from 30 to 35 percent previously.
Canaccord analyst Dley praised the increase. "This is becoming a more mature company, and mature companies in my mind should focus on returning cash to shareholders," he said.