Canadian savers who want to buy top-performing dividend stocks need to understand how a company’s debt will impact shareholder returns.
Investors look at debt levels to determine the allocation of returns between debt-holders and shareholders. If the company is profitable but heavily indebted, bondholders may be reaping more profits than stock market investors.
When bondholders benefit more from company profits than shareholders, the stock price will likely fall in value. Canadian stock market investors need to buy stocks with declining debt and growing revenue to maximize their portfolio returns.
Making large bets on popular, speculative stocks like Shopify is dangerous and can lead to investor remorse. You don’t need to buy into risky stocks to earn high returns.
Technology innovations like 5G spark revenue growth
Cogeco Communications Inc (TSX:CCA) is a broadband and cloud service provider in North America. The company also provides video on demand, the primary beneficiary of expanded 5G networks. Not surprisingly, Cogeco stock returned nearly 83% to shareholders last year, including dividends.
The telecommunication industry is receiving substantial boosts from the 5G rollout and broadband internet expansion in Canada. 5G stock price appreciation is less speculative than cannabis, making these excellent stocks to buy heading into 2020.
Cogeco has reported a trailing 12-month revenue of $2.59 billion in 2019. The company’s revenue is up by $26 million from the $2.33 billion for the company’s 2019 fiscal year ended August 30.
Shareholders can expect the income to continue growing into next year following the 5G rollout and broadband internet expansion.
Debt reduction widens profit margins
Cogeco’s management has done a fantastic job of reducing its debt-to-equity ratio, indicating that the company wants to increase shareholder returns.
The last reported profit margin for the communications stock is a high 17.81%, only about 9% less than the trailing 12-month operating margin of 26.90%.
The primary difference between the operating margin and the profit margin is net interest payments. Canadian investors can quickly check to see how debt levels affect shareholder returns by looking at the difference between these two figures.
If there’s a significant difference between the operating margin and the profit margin, the stock may be a risky bet. Another way to determining if a company’s debt is excessive is by looking at the levered free cash flow (FCF).
The levered free cash flow is how much money remains after the company pays the interest on its loans. A negative levered FCF means that the company is taking on a lot of debt.
Many rapidly expanding industries like cannabis will report negative levered FCF because the companies compete for market share by taking on excessive debt.
Debt leaves less profit for shareholders by allocating a more substantial portion of the returns to bondholders in the form of interest payments.
Higher net worth increases the stock market value
A company’s net worth is the difference between debt and assets. Cogeco’s net worth has doubled since 2016. Cogeco reported a net worth of $2.6 billion in August 2019, almost twice the $1.4 billion announced in August 2016.
Growing net worth should accompany higher market value for shares, and Cogeco’s stock price has followed the increase in net worth with a 78.6% increase in price this past year.
As of the 2019 annual report, Cogeco has a $556.5 million of total cash on hand. Thus, the company is in a much better cash position today than it has been for the past decade.
Canadian savers will want to pick up shares in Cogeco before next year’s 5G rollout to share in the gains.
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Fool contributor Debra Ray has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. Shopify is a recommendation of Stock Advisor Canada.