Rogers Communications (TSX:RCI.B) is a tad different from other big Canadian telecoms. It has a stagnant dividend. On the surface, this may seem like a bad thing for investors. Who doesn’t want a growing dividend? However, precisely because it has maintained the same quarterly dividend since 2019, its dividend has better coverage.
Here’s a business overview of Rogers Communications
In 2023, about half of its revenues were generated from its Wireless segment, of which 76% were service revenue. And about 36% and 12%, respectively, of the remaining revenue came from its Cable and Media segments. Its Wireless segment made close to 73% of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a cash flow proxy. Its Wireless segment also had the highest adjusted EBITDA margin of 63.9%, which expanded 1.2%, followed by its Cable segment that had an adjusted EBITDA margin of 53.9%, helped by a 3.3% expansion.
The dividend stock’s 2023 results
In 2023, Rogers generated $19.3 billion in revenue, which increased 39% from 2020. As well, it reported a gross profit of $8.6 billion and operating income of $4.5 billion. They rose by 47% and 38%, respectively, from 2020.
The company also reported adjusted EBITDA of $8.6 billion, an increase of 34% year over year, with the help of a margin expansion of 2.9% to 44.4%.
The adjusted net income rose 26% year over year to $2.4 billion. Ultimately, the adjusted earnings per share came in 21% higher at $4.60, resulting in a payout ratio of about 44%. The payout ratio was 81% of free cash flow.
In 2023, the dividend stock hardly moved when comparing where it started at the beginning and end of the year. Specifically, the stock was down 2%, closing the year at about $62 per share, while the total return was 1%.
A value stock with stable growth
The value stock is trading at even cheaper levels today. It just pulled back meaningfully by 16% from earlier this year to $53.53 per share at writing. This is a price-to-earnings ratio of about 11.4 – a decent discount of about 24% from its long-term normal valuation. Indeed, TMX Group (TSX:X) indicates that the analyst consensus 12-month price target on the stock is $72.23, representing a discount of 26%, or near-term upside potential of 35%.
The reason for the pullback may be the weakness of its first-quarter (Q1) results. For Q1 2024, Rogers reported revenue growth of 28% to $4.9 billion but adjusted earnings per share was $0.99, down 9%. The stock is seemingly rebounding from the $52 level. So, now could be a good entry point for a turnaround.
Rogers Communications generated operating cash flow of $5.2 billion last year, up 21% from 2020. In the past two years, Rogers used almost 75% of its operating cash flow for capital investment, up from 61% from 2020–2021. A reduction in capital spending could substantially boost the big telecom’s free cash flow generation. Even a dividend hike could be in the cards.
Regardless, the blue chip stock has a good chance of delivering adjusted earnings per share growth of at least 6% per year over the next five years. Along with its dividend and potential valuation expansion, it should result in solid returns in the period. Currently, RCI.B stock offers a dividend yield of 3.7%. Assuming some valuation expansion to 13.5 times earnings and a 6% earnings growth rate, the stock could deliver nice total returns of about 12% per year over the next five years.
