Does Shaw Communications Still Have Room to Grow?

It just hit its 52-week high this week, but is there more growth for this small player in the telecom sector?

| More on:
The Motley Fool

Canada does not have much variety when it comes to telecom providers. Like our banks, this sector is heavily regulated, and it has produced a kind of oligopoly with very high legal barriers of entry. While BCE (TSX: BCE)(NYSE: BCE) gives you a better dividend yield, there are other factors at play that make a stronger case for owning Shaw Communications (TSX: SJR.B)(NYSE: SJR) for the future.

A better operator

Shaw’s management team is executing better with stronger margins across the income statement. Last quarter, it managed to post an EBIT — earnings before interest and taxes — margin of 31.5% compared to BCE that stood at 22.2%. This is a big difference that reflects itself further down in the income statement with a net income margin for Shaw Communications of 16.3% over 12.7% for BCE. While these percentages might not seem relevant when taking into account that BCE is three times the size of Shaw, it shows that there is much more room for this small player to grow. Both these high ratios can be explained in part by the fact that Shaw Communications posts a return on assets of 9.8% almost twice as much as BCE.

A stronger balance sheet

Shaw is less levered than BCE with only 96.2% of total debt to equity meaning that it has more options in case it ever wants to increase its capital expenditures in order to expand its service offering. The telecom sector is one where a ratio of total debt-to-equity near 100% is the norm rather than the exception. It is expensive to build a telecommunication network and it has some barriers to entry for potential new participants. EBITDA for Shaw is more than enough to cover the interest expense.

Shaw Go — the ace in the hand

Shaw’s management team was thinking outside the box when it launched its Shaw Go service three years ago and many Bay Street’s analysts were skeptical of the new strategy. Fast forward to today and it is clear that in a sector where competition is fierce, and consumers are not the most loyal, having free Wi-Fi for your smartphone and tablet wherever you are at no extra cost is a nice differentiator when choosing your cable company.

When you think about it, it is genius. It not only allows Shaw to offer additional value over BCE, but it also steals clients from Telus by allowing customers to bypass Telus LTE network. If the company can deliver a reliable Wi-Fi network countrywide, expensive data plan contracts with wireless carriers would be in great danger, and the value of being a Shaw client would go up tremendously.

In the end, BCE might pay you a higher dividend, but Shaw Communications is offering growth. As an investor, I am more than willing to accept a small percentage cut on my dividend yield if I get to partner up with dynamic management. The potential of owning a much more dominant company in five years is very possible with Shaw Communications.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor François Denault has no positions in any of the stocks mentioned in this article.

More on Investing

Happy family father of mother and child daughter launch a kite on nature at sunset

3 Soaring Stocks to Hold for the Next 20 Years

These three stocks are good bets for the long haul, given their healthy long-term growth prospects.

Read more »

grow dividends
Tech Stocks

Celestica Stock Is up 44% Since Earnings: What Investors Need to Know

Celestica continues to benefit from strong demand and production efficiencies, yet the stock remains undervalued.

Read more »

A plant grows from coins.

2 Dividend Stocks Paying 5% or More That Could Beat the Market in 2024 and Beyond 

Here are two top dividend stocks long-term investors may certainly want to consider for their yields and growth profiles right…

Read more »

edit Balloon shaped as a heart
Dividend Stocks

Love Value Stocks? 2 That Are Screaming Buys in May 2024

Patience can pay off by investing in these two value stocks with nice dividends and the potential to turn around.

Read more »

healthcare pharma
Tech Stocks

What’s Going on With WELL Health Stock?

WELL stock (TSX:WELL) made strong moves once again, with record earnings and even higher guidance for 2024.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

2 Everlasting Canadian Stocks for Your RRSP

The Canadian National Railway (TSX:CNR) stock is worth owning for the long haul.

Read more »

money cash dividends
Stocks for Beginners

Is TD Stock the Best Dividend Stock for You?

Shares of TD stock (TSX:TD) plunged on the news of a money laundering probe. But could this mean it's a…

Read more »

exchange traded funds

New to Investing? Get Started With This Easy, Hands-Off Method

Vanguard S&P 500 Index ETF (CAD-hedged) (TSX:VSP) is a glorious first investment candidate for beginner investors.

Read more »