Tom Slee, The Canada Report
Tom Slee has had a long and distinguished career in the financial field. He spent many years in the insurance business managing pension money, with an emphasis on fixed-income securities. Prior to retiring, he held a senior position at Revenue Canada (now the Canada Revenue Agency) for several years, so he is an authority in tax matters as well as securities. Tom is one of the rare individuals in Canada to hold both CFA (Chartered Financial Analyst) and CGA (Certified General Accountant) designations. Some readers will recognize him from the columns he wrote in Investor’s Digest for years under the pen name “Exchequer”. Tom is a contributing editor to both the Internet Wealth Builder and The Income Investor.
Rogers Communications (NYSE: RCI)
The business: Rogers Communications (RCI) is the dominant cable company in the large Toronto market and the number one provider of wireless services in Canada with 7.2 million subscribers. It has extensive media interests including 51 radio stations, 69 consumer and trade magazines, and several television channels. The company also owns the Toronto Blue Jays baseball team and the domed stadium they play in.
Why we like it: In markets like these, Rogers stands out as an excellent defensive stock. It has the best fundamentals within the growing Canadian telecom industry and this is going to pay off. The company continues to gain wireless market share and enjoys strong cable franchises in the lucrative Toronto and Ottawa regions.
Rogers’ overall credit quality, once highly suspect, has improved substantially over the last two years. As a result, it’s well positioned to compete in Industry Canada’s forthcoming auction for advanced wireless services (AWS) although the results are bound to create more competition. This company has a strong, wellestablished franchise, excellent cash flow, and good growth potential. The share price has taken a hit in this market correction, making it even more attractive.
Financial highlights: Third-quarter profit rose an impressive 75% to $269 million, up from $154 million the year before (financial results in Canadian dollars). Revenues were $2.6 billion compared to $2.3 billion in 2006. Once again, the wireless business delivered and Rogers cracked the seven million subscriber mark during the quarter. However, and this is what I find reassuring, other segments also showed healthy growth. Cable, digital Internet, and even home phone added customers. CEO Ted Rogers said: “This was a quarter that some of you might consider to be on the boring side”. If that’s the case, I would welcome more “boring” results. Management has indicated that 2007 free cash flow will exceed $1 billion.
Given the already over-capitalized balance sheet, that had analysts speculating about increased dividends and share buybacks this year. No sooner said than done: on January 7th the company announced that it is doubling the annual dividend to $1 a share and implementing a plan to buy back $300 million worth of its class B shares. With margins improving, we should see earnings of about $2 a share in 2008 and as much as $2.40 next year.
Risks: There is a lot of competition in the Canadian wireless industry, which could temper the company’s 2008 results. However, reports are that Rogers will be the first to offer the Apple iPhone in Canada and may have exclusivity on it for some time. There has also been concern that Rogers may face competition from Vancouver-based Telus in the field of GSM technology – Rogers is the only Canadian company to offer the service now. However, that is probably many months away and would represent a significant investment for Telus.
Summing up:This is the premier cable and wireless company in Canada and the stock represents good value at the current price.
Action now:Buy Rogers with a target of $55, with a proviso that the stock is likely to be buffeted by a volatile market in the first half of this year.