The Stock Picker’s Guide to Rogers Communications in 2014

Rogers Communications (TSX:RCI.B)(NYSE:RCI) is a market leader in the Canadian telecommunications and media industry with 1.2 million fixed line, 9.5 million wireless, 2.0 million high speed internet and 2.1 million television subscribers.

The company recently reported 2013 full year results that proved somewhat disappointing to the market. The business produced revenue of $12.7 billion and a gross profit of $4.9 billion, which was slightly better than the year before. Earnings per share was unchanged and the dividend per share for 2014 was increased by 5%.

The company added subscribers over the year in the wireless, internet and cable segments but the television business struggled with a net loss of 87,000 subscribers (-3%) over the year. The positive surprise was the net addition of a small number of landline users compared to the substantial net losses of landline subscribers reported by the main competitors BCE Inc. (TSX:BCE)(NYSE:BCE) and Telus (TSX:T)(NYSE:TU).

The main disappointment related to the important wireless segment where net new subscribers were close to zero and the average revenue per user declined substantially during the last quarter of 2013. Given the importance of this segment to Rogers in terms of profit contribution, the concern of the market was understandable.

Key issues to watch in 2014

The company indicated that it expects operating profit to increase by 0%-3% in 2014 while after-tax free cash flow would decline. This profit guidance from Rogers is considerable weaker than the projections issued by BCE and Telus. The forecasts may to some extent be influenced by the new CEO who took office in late 2014. He is expected to present his strategic plan for the company to the Board in May 2014 and it would be understandable if the projections were somewhat conservative.

Among the major risks to the company in 2014 is the outcome of the 700 MHz spectrum auction that is currently underway and which could lead to a considerable acquisition cost and increased competition. Unfortunately the company was not allowed to provide any further update at the time of the recent results announcements and we will have to await the formal public announcements of the outcome.

Some concerns about the dividend

Rogers has managed to pay uninterrupted and growing dividends over an extended period of time. For the past five years the dividend has increased on average by more than 10% per year supported by strong free cash flow generation. However, for 2014 the dividend guidance was upped by only 5%, which may indicate that the company is starting to feel the requirement to conserve cash for heavy spectrum acquisition costs.

Combined with an already considerably leveraged position and a lower free cash flow estimate for 2014, I am concerned that the dividend may not grow by much over the next few years.

The Foolish bottom line

The company is the market leader in the highly profitable wireless communication business in Canada but its prime position is eroding. The current valuation of the stock is at a slight discount to its main rivals but not enough to compensate for the inferior growth prospects.