John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
For shareholders of Rogers Communications Inc., 2016 has gotten off to a rocky start.
First, the company failed to raise its dividend in January, ending a streak of annual increases stretching back more than a decade. Then all seven Canadian teams missed the National Hockey League playoffs, depriving Rogers of lucrative ad revenue under its NHL broadcast deal. Finally, the wireless, cable and Internet giant recently posted first-quarter EBITDA (earnings before interest, taxes, depreciation and amortization) that missed analyst estimates and fell on a year-over-year basis for a second consecutive quarter.
Not surprisingly, Rogers' stock isn't exactly looking like a Stanley Cup contender, either. After clobbering the S&P/TSX composite index last year, the shares have posted a meagre total return, including dividends, of about 2.2 per cent so far in 2016. That compares with a total return of about 7.7 per cent for the benchmark index.
Buying good companies whose shares have underperformed can be a profitable investing strategy. So is it time to take the plunge with Rogers?
I'll pass, thanks. For one thing, the dividend might not grow for a while.
When Rogers left its dividend unchanged – a decision that caught many investors by surprise – the company said it wanted to focus on reducing its debt. However, Rogers' net debt rose to 3.2 times EBITDA in the first quarter, up from 3.1 in the fourth quarter, Desjardins Capital Markets analyst Maher Yaghi said in a note.
What's more, capital spending in Rogers' cable division climbed to 28.7 per cent of revenue, up from 25.7 per cent a year earlier. As a result, unless Rogers decides to sell non-core assets to raise cash, the company is unlikely to resume dividend increases before the end of the year, he said.
"With no dividend increases expected in 2016, coupled with a high relative valuation, we would prefer to wait for a better entry point," said Mr. Yaghi, who rates the stock a "hold" with a 12-month target price of $52.50. Rogers closed Tuesday at $48.76.
Rogers trades at about 16.9 times estimated 2016 earnings, compared with 16.5 for BCE Inc. and 14.8 for Telus Corp., according to Globeinvestor.com. Rogers' dividend yield of about 3.9 per cent is also lower than BCE's, at 4.7 per cent, and Telus's, at 4.5 per cent.
Another concern is that Rogers appears to be relying increasingly on promotions to drive growth. For example, the company added a net 16,000 Internet customers in the first quarter – topping expectations – but Mr. Yaghi attributed the strength to "more aggressive bundle pricing" including hefty two-year discounts offered as a way to retain existing customers.
"We believe these efforts were mostly undertaken to counter competition from Bell, as its fibre service footprint is growing and its pricing becoming more enticing to consumers," he said.
On the wireless side, Rogers also faces growing competition now that Shaw Communications Inc. has acquired Wind Mobile Corp. and its 940,000 customers in Ontario, British Columbia and Alberta. Competition could be especially fierce in Western Canada, where Calgary-based Shaw can now offer a "quad play" of TV, Internet, home phone and wireless services.
Rogers' wireless profit margins are already coming under pressure as industry players offer incentives to acquire and retain customers. "While the ramp-up in promotional activity in March was well known, the magnitude of the margin pressure was greater than we anticipated," RBC Dominion Securities analyst Drew McReynolds said in a note.
Following Rogers' first-quarter results, Mr. McReynolds lowered his target price on the shares to $54 from $55 but maintained his "outperform" rating. Even with the current headwinds, the stock is attractive for patient investors, he said.
"Despite the pause in dividend growth, we continue to see an attractive set-up for the stock over the next [one-to-two] years," he said, citing growth in video data consumption and Rogers' efforts to improve customer satisfaction, among other factors.
Certainly, Rogers deserves credit for improving its customer service. Customer complaints fell by 65 per cent in the six months ended Jan. 31, according to the Commissioner for Complaints for Telecommunications Services. In another positive sign, customer turnover in Rogers' wireless business fell to 1.17 per cent in the first quarter, down from 1.24 per cent a year earlier.
"In our view, management is executing reasonably well on its plan to provide better customer service and build brand loyalty, but thus far robust earnings growth has been elusive for Rogers," Odlum Brown analyst Cory O'Krainetz said in a note. "Nonetheless, we are optimistic that an improved customer experience will ultimately lead to stronger earnings in the years ahead."
That may be the case, but for dividend growth investors like me, Rogers remains a show-me story.