Regular readers of this column know that I’m a big fan of companies that raise their dividends. A growing payout not only puts more cash in your pocket, but is often a sign of a thriving business.
When a company goes without an increase for a long period, on the other hand, it can sometimes be a sign of trouble.
As with any investing rule of thumb, however, there are exceptions.
Case in point: Rogers Communications Inc.
The last time Rogers raised its dividend was on Jan. 30, 2015 – nearly three and a half years ago. Since then, rival Telus Corp. has announced seven dividend increases, boosting its payout by a total of about 31 per cent. BCE Inc. has hiked its payment four times, for a total increase of about 22 per cent.
Yet the stock with the best return over that period wasn’t Telus or BCE. It was Rogers – by a wide margin. Since the start of 2015, Rogers’ total return – assuming all dividends were reinvested – was about 15 per cent on an annualized basis, compared with about 8.1 per cent for Telus and 6 per cent for BCE.
How did Rogers pull this off?
Well, instead of raising its dividend, the company decided to channel its extra cash to capital spending and debt reduction. Under chief executive officer Joe Natale, a former Telus CEO who joined Rogers in April, 2017, the company has also focused on improving its customer service and reducing subscriber turnover.
These moves have been paying off.
For the three months ended June 30, Rogers added a net 122,000 postpaid wireless subscribers – its best second quarter for that key metric in nine years. Its customer “churn" rate was just 1.01 per cent – the best result for any quarter in nine years.
What’s more, the company ended the quarter with a debt leverage ratio of 2.6, down from 2.7 at the end of 2017. (Rogers defines debt leverage as adjusted net debt divided by 12-month trailing adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA.) Rogers’ goal is to get the leverage ratio down to two to 2.5 times.
With the leverage ratio approaching the company’s target range, there is speculation that Rogers could begin raising its dividend again soon. However, based on comments made during the second-quarter conference call on July 19, such a move does not appear to be imminent.
“While we’re pleased with our progress here, we’re focused on the value drivers of the business and will revisit long-term sustainable dividend growth at the right time,” chief financial officer Tony Staffieri said in his prepared remarks.
When an analyst later asked about the dividend, Mr. Staffieri responded that “nothing has changed in terms of the factors we look at. We’ve always said that we think about dividend increases as something that we want to be very careful and thoughtful about because they need to be long-term and sustainable.”
Despite uncertainty regarding the timing of the next dividend hike, most analysts are bullish on the company. Of the 18 analysts who follow the stock, there are 10 buy ratings, eight holds and no sells, according to Thomson Reuters. The average 12-month price target is $71.94. The stock closed at $65.50 on Tuesday and yields about 2.9 per cent based on the annualized dividend of $1.92 a share.
In light of the strong second-quarter results, analyst Maher Yaghi of Desjardins Securities reiterated his buy rating and raised his target price to $72 from $70. Although Rogers’s valuation is now in line with peers, its above-average expected EBITDA growth rate of 6 per cent to 7 per cent in 2018 makes the stock attractive, he said in a recent note.
As for the dividend, Mr. Yaghi said Rogers is poised to get its leverage down to about 2.5 times by the end of the year, helped by a reduction of capital spending related to the launch of its internet-based Ignite TV platform. This “increases the likelihood that [the company] will resume its dividend growth program in 2019,” he said.
For investors who have enjoyed the run-up in the share price over the past few years, that will be a nice bonus.
A&W serves up another distribution increase
Just a quick update on one of the stocks in my model Yield Hog Dividend Growth Portfolio: Thanks to a strong second quarter in which same-store sales surged 6.6 per cent, A&W Revenue Royalties Income Fund on Tuesday hiked its monthly distribution by 2.2 per cent to $1.692 on an annualized basis. It marks the third consecutive quarter that the burger chain has raised its distribution. Globe Unlimited subscribers can view the complete model portfolio at tgam.ca/dividendportfolio.
Disclosure: The author also personally owns shares of AW.UN.