Does Rogers Communications Inc. and its 4.5% Yield Belong in Your Portfolio?

Rogers Communications Inc. (TSX:RCI.B)(NYSE:RCI) pays a great dividend. But that’s not the only reason to get excited about the stock.

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About a year ago, I had some cash I wanted to earn interest on, but I wanted to keep liquid and protect the principal. A GIC was my obvious choice.

So, I went down to the bank, and signed up for a one-year GIC. My interest rate was a whole 1.3%, and that was after I managed to charm the employee into giving me a slight raise from 1.25%. I cringe every time I look at the statement. 1.3% just seems so terrible, especially when I know it’s easy to get much higher yields in the market.

Since it was just a short-term investment, I didn’t want to take the risk of losing capital. But for most investors who plan to use dividends as a source of income during retirement, this isn’t really a big issue. Sure, stocks will fall, but over 20 or 30 years, they’ll go up. The only issue is picking high-quality companies that deserve your investment dollars.

I think Rogers Communications Inc. (TSX:RCI.B)(NYSE:RCI) is one such company. Here’s why you should have it as a core holding in your portfolio.

It’s undervalued

Compared to its competitors, Rogers is a pretty cheap stock.

The company earned $2.59 per share in 2014, which puts it at 16.5 times earnings. Telus earned $2.30 per share, putting it at 18.75 times trailing earnings, while BCE earned $2.98 per share, which puts it at 18.6 times earnings. Rogers is more than 10% cheaper than its peers on a price-to-earnings basis.

On a forward-earnings basis, Rogers is also the cheapest choice. The company is projected by analysts to earn $3.02 per share in 2015, which puts it at a P/E multiple of just 14.2. That compares to Telus and BCE, which have forward P/E ratios of 16.8 and 16.7, respectively.

One of the reasons why Rogers is cheaper than its competitors is because it has more debt, which it took on to expand its wireless network. That’s a concern, but Rogers generates plenty of cash flow to pay it off.

Potential operations improvement

When it comes to the wireless sector, Telus is the talk of the town.

Telus has an industry-low churn rate, which measures how many customers leave for a competitor each month. By giving its customer service reps the freedom to make more decisions, it really improved service. I can personally attest that phoning Telus is actually a pleasurable experience.

That’s been bad news for Rogers and Bell, but it also creates an opportunity. Telus has shown that improving customer service is possible; it’s just a matter of execution. Essentially, all the competitors have to do is copy its lead.

Rogers has also been experiencing issues with front-line sales employees; the company offers so many different plans that staffers often forget that half of these plans even exist. Steps are being taken to streamline the sales process.

Investors have to remember that even though everyone wants to talk about Telus’s wireless growth, Rogers is still the nationwide leader in the sector. It’s always easier to right the ship when you’re the leader.

That dividend

There aren’t many investments that can give you a yield of 4.5% with the kind of dividend security that Rogers offers.

Dividend growth over the last decade has been nothing short of fantastic. In 2005 the company paid just 5.8 cents per share in annual dividends. After its latest announced hike, 2015’s dividend will be $1.96 per share. Investors probably can’t expect that kind of growth over the next decade, but I think an annual raise in the neighborhood of 5% is very achievable.

The payout ratio has crept up over the years, but it currently sits at a pretty comfortable 74%. Keep in mind that the payout ratio will slip to approximately 65% in 2015 if the company can hit expected earnings targets.

Rogers is in the middle of a turnaround. It’s cheaper than its peers, pays a great dividend, and enjoys a dominant position in a market that’s protected from competition. Based on its history, I think it would make a great addition to any portfolio.

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 Nelson Smith has no position in any stocks mentioned. Rogers Communications is a recommendation of Stock Advisor Canada.

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