The Halifax-based company will pay a quarterly dividend of 11.25 cents per share or 45 cents per year effective Jan. 17 to shareholders of record on Dec. 31.
The increase partially restores the quarterly dividend that was cut in half to 7.5 cents per share in May amid uncertainty about the outcome of the protracted arbitration process.
"Our business is strong and we remain focused on improving our cost competitiveness," said president and CEO Joseph Randell in a statement Tuesday.
He said the dividend level will allow the company to pay down maturing debt, fund initiatives to reduce costs and support capital projects and growth opportunities.
Shares of Chorus (TSX:CHR.B) lost more than a third of their value after the dividend was cut, but recently recovered on expectations that Chorus wouldn't likely be required to make a large retroactive payment to Air Canada even if it lost the arbitration decision.
Following the dividend hike, the stock rose more than six per cent, or 23 cents at $3.96 in Tuesday morning trading on the Toronto Stock Exchange.
An arbitration panel supported Chorus's contention that there was no justification for changing the current 12.5 per cent markup on how much its Jazz subsidiary receives from Air Canada. The ruling relieves Chorus from paying retroactive payments to the country's largest airline (TSX:AC.B).
The two sides have battled over the permitted growth of controllable costs — including salaries and wages, maintenance and overhead — under their capacity purchase agreement or CPA. Both sides agreed to compare or benchmark Jazz costs in 2009 and later in 2015 to those of a specified group of similar operators in the U.S.
Walter Spracklin of RBC Capital Markets said the dividend increase is "wholly viable" considering the loan repayments to purchase Bombardier Q400 aircraft and projected cash taxes in 2016. He said the dividend will result in a payout ratio of 70 to 75 per cent in 2016.
"With a dividend increase now approved, we believe this will provide the confirmation that there is an indeed a sustainable improved cash flow profile," he wrote in a report.
David Tyerman of Canaccord Genuity said he continues to recommend selling Chorus shares due to heightened market competition even though he said the dividend should be "safe" until the capacity purchase agreement (CPA) expires at the end of 2020.
"We think it is inevitable that Chorus's costs to Air Canada must come down, or Air Canada (and Chorus) will likely suffer market share erosion and/or significant profit decreases," he wrote.
Tyerman said he doesn't see how Chorus can sufficiently cut the higher costs of its legacy union workforce to meet the levels of new rivals such as WestJet, Porter Airlines or Sky Regional which flies some of the Air Canada's regional operations.
WestJet (TSX:WJA), which launched its Encore regional service in Western Canada and plans to expand next summer to Eastern Canada, enjoys a 30 to 50 per cent cost advantage.