1 Magnificent Dividend Stock Down 23% to Buy Right Now Near a Once-in-a-Decade Valuation

Patient investors could be happy with this dividend stock a few years down the road.

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Rogers Communications (TSX:RCI.B) stock has fallen by over 23% since its peak in April 2022. Other big Canadian telecom stocks have experienced similar declines. The stocks of BCE and TELUS are down by 27 to 28% from their 2022 peak.

Dividend stock trading at a decade’s low valuation

At $53.71 per share at writing, Rogers Communications stock trades at a decade’s low valuation at a blended price-to-earnings ratio (P/E) of about 11.5 compared to where it normally trades at, which is a multiple of about 15.7.

Let’s be more conservative and say that it could eventually return to a P/E of 15. This would represent a fair price of $70.33 today. Analysts’ consensus is a 12-month price target is $72.14. This represents near-term upside potential of over 30%, which is very good for a blue chip stock.

What’s weighing on the big telecom stocks, including Rogers? Here are some of the factors.

Higher interest rates

The Bank of Canada began raising interest rates in 2022 to counter higher inflation. From 0.25% then, the policy interest rate has increased to 5%. This rapid increase in interest rates has triggered a re-rate in stock valuations, particularly for those (such as the big telecoms) with high debt levels and high dividend yields.

In a higher interest rate environment, it means a higher cost of capital. Businesses with high debt levels will be hit with higher interest rates when it comes time to refinance their debt or when they’re making a new loan. Paying down debt to reduce borrowing costs means that there will be less capital for other things, such as for reinvesting into the business and paying out dividends to shareholders.

When interest rates were low, investors put more money in dividend stocks to earn more income. When interest rates popped back up, investors were able to get similar or higher income from lower-risk, interest investments like bonds and guaranteed investment certificates (GICs). In particular, GICs offer protection of the principal, which allows investors to be worry-free from losing their hard-earned savings.

Market-linked GICs are also available for investors who want to protect their principal and potentially get higher returns if the market does well. However, the appreciation would be lower than if you invested in the actual market because of the principal protection guarantee. There’s no free lunch, after all.

Increased regulatory and pricing pressure

Regulatory pressures are an ongoing issue. For example, an article published in the Canadian Press in December 2023 talked about increased regulation for the industry that pushed for prioritizing consumer rights, affordability, competition, and universal access.

Pricing pressure is another issue. According to an article published in February 2024 on Toronto.com, HelloSafe, a Canadian financial services comparison company, ranked countries around the world for mobile data costs, and Canada came in as the 10th most expensive country for mobile data. The report showed the average cost per one gigabyte of mobile data (based on September 2023 prices) in Canada was $7.36.

Investor takeaway

No matter what, Rogers Communications stock seems to provide the best value of the Big Three Canadian telecom stocks. Although it offers the lowest yield of 3.7%, it has the best coverage for its dividend. It also has a more neutral stock price chart, which shows a multi-year sideways range versus an obvious downtrend for its peers. So, the dividend stock appears to be a good buy right now.

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. The Motley Fool has a disclosure policy.

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