Many value investors may be wondering what’s going on with shares of Rogers Communications (TSX: RCI.B) and its relatively muted dividend yield. Undoubtedly, the Canadian telecom firms (the Big Three, as they’re often referred to) have been under a growing amount of pressure in recent years.
In simple terms, there was a vicious crash, and when it comes to some of Rogers’s top peers, most notably Telus (TSX: T), which now yields north of 11% (and no, that’s not a typo), there’s seemingly a lot more to offer for those who aren’t rattled by extreme levels of volatility and painful downside moves. Indeed, going into the second half, I expect bottom-fishing for Telus shares to be a popular trade.
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Rogers’s dividend yield might be modest, but it’s on a rock-solid foundation
There’s nothing quite like locking in a double-digit percentage dividend yield, even if it means risking a dividend cut in two years or so, as well as more of the same. For Telus, it can’t seem to catch a break, even though the firm is actually quite well set up when it comes to its cash flow situation. Despite improvements, the telecom industry is in an uncertain spot as the price to the bottom unfolds, while the lingering disruptive threat from satellite connectivity providers grows louder.
Of course, telecoms have teamed up with satellite connectivity providers, and that’s a good thing over the medium term. But what happens if these providers launch their own mobile services, cutting traditional telecoms out altogether?
I’m not sure when the tech will improve to the point that consumers choose to go all-satellite. But I acknowledge it’s a risk and one that ought to be managed. Personally, I think the risk has been baked into valuations across the board. Just look at the damage that’s already been done to the telecom stocks.
Rogers’s dividend is safe, but is the value proposition good enough?
As Telus offers its sky-high yield, Rogers sports a mere 4.3% yield. So, why bother going for a dividend whose yield is less than half that of a rival? With shares tanking 17% off 52-week highs, the name is now off about 37% from its all-time highs. No longer is Rogers spared from the pain sweeping through the industry, but, at the same time, I think Rogers stock could be the play despite a lacklustre showing in the lost decade that lies behind it.
First, that dividend is more than safe. It passes the dividend safety test with flying colours, and there’s room for dividend growth as Telus keeps further dividend hikes on ice, at least over the medium term. With Rogers also doing its best to delever the balance sheet while also making the most of the sports assets, I do think the name has a solid, unique mix of assets.
While Rogers’s sports empire is worth paying a premium for, the firm still shares choppiness as telecom wanders into rougher waters. Perhaps the biggest reason to stick with Rogers lies in the price of admission. Shares go for 9.6 times forward price to earnings. That’s ridiculously cheap, even if prices drop on wireless services and margins feel more of a squeeze. If you want a dirt-cheap stock with a dividend that has staying power, perhaps Rogers is the best of the Big Three.
