Over the last year, as inflation has begun to surge and interest rates have increased rapidly, many are fearing a recession. In preparation, most investors have been rebalancing their portfolios, looking to sell off higher-risk stocks and buy high-quality stocks at a discount. So with Cogeco Communications (TSX: CCA) trading almost 40% off its 52-week high, naturally, it’s a stock that Canadians are interested in.
Cogeco Communications has a relatively straightforward business. It has two segments, one in Canada and the other in the United States, both of which are quite similar.
In Canada, its business, Cogeco Connexion, is the fourth largest cable company with operations in southern Ontario and Quebec. The telco offers cable, internet, and phone services, just as its brand Breezeline does in 13 states south of the border.
And while both segments earn Cogeco roughly similar revenue right now, they aren’t always growing at the same pace. For years the American segment has offered superior growth potential. Lately, however, both segments have seen some losses. Cogeco put out guidance for 2023 sales to be below 2%.
Therefore, the stock has sold off significantly over the last year on fears that Cogeco’s business will be impacted.
So the question is, has the market overreacted to this impact on its business? And if, yes, is this massive discount an opportunity to gain some exposure?
Is Cogeco stock worth buying today?
Cogeco and communications stocks, in general, are typically highly reliable stocks with robust revenue and earnings. For example, during the pandemic, Cogeco never saw a single quarter where its revenue declined. This is in large part due to the essential services it offers, particularly internet services.
Furthermore, Cogeco hasn’t had a quarter where it lost money since early 2016. So, it’s typically a stock that investors look to buy and hold for years.
Plus, in addition to its resiliency, Cogeco pays an attractive dividend and one that’s ultra-safe. Right now, its dividend offers a yield of roughly 4.4%. On top of that, the dividend has been increased for 18 consecutive years, making Cogeco an attractive dividend growth stock.
As for the safety of the dividend, in fiscal 2022, CCA had a payout ratio of just 22% of free cash flow. And this year, even in the worst-case scenario, Cogeco doesn’t see the payout ratio going above 36%.
An enticingly valued Telco stock
So although the loss of Internet subscribers in the U.S. for two straight quarters is concerning, Cogeco is a historically low-risk investment. Furthermore, its balance sheet is solid and healthy thanks in large part to its consistent growth in revenue, EBITDA (earnings before interest, taxes, depreciation and amortization), and free cash flow.
Therefore, while Cogeco stock trades at such a significant discount and offers such a compelling dividend yield, many investors may consider it worth buying today.
Cogeco has historically had an average enterprise value (EV)-to-EBITDA ratio of 6.7 times. Today, however, it’s trading at just 5.7 times its forward EBITDA.
So although there is certainly more risk in today’s environment, both with Cogeco’s business and the market in general, a more than 35% discount on the stock seems excessive.
Without a doubt, if you’re looking to take advantage of the bargains in this market environment or just add a reliable dividend aristocrat to your portfolio, Cogeco is certainly a stock you should consider today.
