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Overview

Rogers Communications, Inc. (NYSE:RCI) is a major Canadian-based provider of telecommunication services, including wireless and Internet services. Rogers also owns several sports and media properties.

Rogers trades on the Toronto Stock Exchange (TSX) under the ticker "RCI.B", and also trades on the New York Stock Exchange (NYSE), under the ticker "RCI".

RCI is part of the S&P/TSX60 index.

RCI is a Canadian corporation and therefore pays its quarterly dividends in Canadian dollars. All the following figures are thus in Canadian dollars.

Notably, foreign investors will likely be subjected to withholding tax.

Dividend Calendar

RCI pays a quarterly dividend.

The dividends are generally declared in October, February, April, and August, and are generally paid in January, April, July, and October.

RCI generally increases its quarterly dividend once a year, in February. In that sense, the last increase in February 2014 was of 5.2% (CA$0.4350 per quarter to CA$0.4575 per quarter).

Dividend History

RCI has increased its quarterly dividend for 10 consecutive years, making RCI a dividend contender (between 10 and 24 years of consecutive dividend increases).

The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

As we can see from the graph, RCI has two dividend lives. One before 2007 and one after 2007.

Indeed, prior to 2007, the dividend rate was relatively low. Then, between 2006 and 2008, RCI has significantly increased its dividend, moving it from CA$0.08 (annualized) in 2006 to CA$1.00 (annualized) in 2008.

Since 2008, the dividend growth rate has stabilized at slightly more than 10%.

For the future, as we will see, the dividend growth rate is likely to follow the earning growth rate.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?
  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purpose.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios.

Then, the evolution of the free cash flow, dividends, and payout ratios.

Starting with the earnings, we now understand RCI's behavior with respect to its dividend.

Before 2006, the earnings were low and sometimes even negative.However, since 2007, the earnings are on a clear upward trend which bodes well for the future.

Also, as we can see, RCI seems to have established a target earning payout ratio at about 50%. Indeed, when we look at the payout ratio since 2009, it follows a straight line at 50%. A payout ratio of 50% is safe and allows RCI enough room for further dividend increases even if RCI faces a tough year or two.

Also, with a clear target payout ratio, we can safely assume that future dividend increases will generally be in line with the earning growth in order to maintain the target payout ratio.

As for the free cash flow, the values are more erratic. Despite showing what seems to be an upward trend since 2006, it remains that 2008 and 2012 have been tough, particularly 2008.

Since 2009, the free cash flow has been generally stable, which has caused the payout ratio to creep up from about 40% to about 70%.

Though I would definitely prefer a lower free cash flow payout ratio, I'm not overly alarmed at this point, the more so since the earning payout ratio remains steady at 50%.

Also, as mentioned for Telus (NYSE:TU) and BCE (BCE), the Canadian telecommunication market is controlled by three main operators, BCE (TSX: BCE), Telus (TSX: T) and RCI. Hence, RCI's earnings are largely protected.

Overall, I think the current dividend is safe. The earning and free cash flow payout ratios are very reasonable.

Is the current dividend likely to grow?

The quick answer is yes.

Since 2006, RCI has shown a clear willingness to pay meaningful and growing dividends to its shareholders.

Also, RCI has likely established a target earning payout ratio around 50%.

Hence, as long as RCI's earnings are growing, RCI's dividend will likely grow.

With respect to the growth in earnings, RCI has made several purchases in recent years in order to secure content. With its combination of telecommunication services, media and sport franchises, RCI should be well-positioned to extract value by cross-selling its assets.

Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjusted for inflation.

For RCI, I've used the following inputs:

  • Share price: $43.00
  • Dividend rate: $1.83
  • Dividend growth rate:
    • Optimistic scenario: 12.0%
    • Realistic scenario: 9.6%
    • Pessimistic scenario: 7.2%
  • Inflation rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR.

However, in the present case, I've used the 5-year average DGR to avoid the major increases in 2007 and 2008. The 5-year average is more representative of RCI recent dividend growth rate.

According to the above values, the range of estimated fair values for RCI varies from $52.15 (pessimistic) to $85.74 (optimistic) with a realistic value of $66.55.

With a current share price around $43.00, RCI appears undervalued.

I've also calculated that the DGR would need to be 5.22% over the next 20 years to justify the current price of $43.00.

Notably, a DGR of 5.22% is well below the pessimistic DGR and is lower than the recent (last 5 years) earnings growth rate.

Hence, I think RCI should be able to maintain a DGR of at least 5.22% in the future.

At $43.00, I think RCI is undervalued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculate how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years.

Estimated cash return values allow to compare dividend stocks with different yields and different growth rates.

For RCI, I've used the following inputs:

  • Initial investment: $1000
  • Current yield: 4.26%
  • Dividend growth rate:
    • Optimistic scenario: 12.0%
    • Realistic scenario: 9.6%
    • Pessimistic scenario: 7.2%

Notably, the DGRs are the same as the DGRs used for valuation.

I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% (e.g. Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)).

With respect to the cash return, RCI appears to be a sound investment.

Even assuming the pessimistic DGR of 7.2% which is well below the 5-year average DGR, an investment in RCI would return more cash than a comparable investment in the benchmark stock.

Understandably, the combination of a yield of 4.26% and a DGR of at least 7.2% is a powerful one. If RCI manages to growth its dividend at an average rate higher than 7.2%, the cash return will be even better.

I've determined that RCI's DGR would need to fall to 6% for RCI to start returning less cash than the benchmark stock. Notably, a DGR of 6% is half the rate at which RCI has been able to raise its dividend over the last 5 years. RCI should be able to do better than 6% in the future.

At the current price and yield, I think RCI would make a good dividend investment.

Conclusion

As we can see, RCI has all the characteristics of a great dividend stock.

It has a great yield (~4.25%), its recent dividend growth rate is very interesting (~12%) and its earning payout ratio is safe (~50%).

In addition, at the current price of CA$43.00, RCI is far from being overvalued. In fact, according to my calculations, RCI even seems undervalued.

In my view, there is not much to add.

Final recommendation: I think RCI is a buy.

Full Disclosure

I don't currently own shares of RCI.

I don't intend to initiate a position in RCI within the next 72 hours.

Source: Rogers Communications, Inc. - Dividend Fact Sheet