Beat the TSX With This Cash-Gushing Dividend Stock

This cash-gushing dividend stock that’s trading at a discount has a good chance of delivering nice returns over the next five years.

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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.

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 Kay Ng has positions in Rogers Communications. The Motley Fool recommends Rogers Communications and TMX Group. The Motley Fool has a disclosure policy

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