Rogers Communications: Resilient To The Pandemic But Wait For A Correction

Rogers Communications (RCI) is the second-largest telecommunications company in Canada, behind BCE (NYSE:BCE). Rogers has been affected by the pandemic but its performance has been fairly resilient while the company has promising growth prospects ahead. However, as the stock has rallied 25% in less than three months, investors should wait for a correction of the stock before initiating a position.

Business overview

Thanks to the nature of their business, telecommunications companies are supposed to be relatively immune to recessions. However, the coronavirus crisis has affected Rogers to some extent, primarily due to the forced shutdown of its stores for a considerable period. The pandemic also reduced the roaming revenue of Rogers due to the collapse in the number of travelers this year.

In the third quarter, Rogers improved its performance sequentially, as the second quarter was marked by unprecedented lockdowns, but its performance remained worse compared to last year. Its revenue decreased 2% over the prior year’s quarter due to the above reasons and its adjusted earnings per share decreased 9%. In the full year, Rogers is expected to incur an 18% decrease in its earnings per share.

On the bright side, Pfizer (PFE) and Moderna (MRNA) have reported exciting results in their vaccine studies. In addition, the results of other studies also are anticipated with optimism. Overall, billions of vaccines will be distributed worldwide next year and hence the pandemic is likely to subside at the latest in the second half of next year. Such a development will certainly benefit Rogers, as its roaming revenue will return to normal levels and its stores will return to normal operation mode.

Growth prospects

Despite its dominant position in its business, Rogers has a lackluster performance record. To be sure, the company is expected to report earnings per share of $2.59 this year. This is essentially the same amount of earnings the company posted in 2010. In other words, Rogers has failed to grow its earnings per share for a whole decade.

On the other hand, Rogers is likely to grow its earnings in the upcoming years, primarily thanks to the expansion of its 5G network. Rogers was the first company that deployed 5G technology in Canada. It also has the largest 5G network in Canada, with its network being supported by Ericsson (ERIC). Rogers has expanded this network to 130 cities and towns in Canada and has plenty of room to keep expanding its network. As a result, the company is expected by analysts to grow its earnings per share 14% next year and 5% in 2022.

Debt

Just like most telecommunications companies, Rogers carries a high amount of debt due to the hefty capital expenses required for the maintenance and the expansion of networks in this business. The net debt of Rogers (as per Buffett, net debt = total liabilities – cash – receivables) currently stands at $18.2 billion. This amount is 77% of the market cap of the stock and approximately 15 times the earnings of the company in the last 12 months and hence it's high. On the other hand, this level of debt is undoubtedly manageable, particularly given the resilient earnings of Rogers.

Moreover, the huge capital expenses required in this business constitute a wide business moat, as they pose high barriers to entry to potential competitors. It's nearly impossible for a new player to enter the Canadian market and gain market share from Rogers due to the excessive investments the new player would have to implement. Therefore, Rogers is likely to remain the second-largest telecommunication company in Canada for many more years.

Valuation

Rogers is trading at a trailing price-to-earnings ratio of 19.7 and a forward price-to-earnings ratio of 18.3. As the pandemic is likely to prove a one-time headwind for the company, it's better to focus on the forward earnings multiple of the stock. Nevertheless, even this price-to-earnings ratio is higher than the average price-to-earnings ratio of the stock over the last decade (15.3).

It's thus evident that the market already has priced a significant portion of future growth in the stock and hence the stock is richly valued right now. If the stock reverts to its average valuation level over the next five years, it will incur a 16.4% drag (=1 - 15.3/18.3) to its total return over this period (3.5% per year on average).

Dividend

Rogers is currently offering a 3.2% dividend yield. This yield may seem lackluster on the surface but it's twice as much as the dividend yield of the S&P 500. In addition, the dividend can be considered safe for the foreseeable future, given the healthy payout ratio of 63%, the manageable amount of debt and the growth of earnings expected in the upcoming years.

The current payout ratio is somewhat higher than the long-term target payout ratio around 50% of Rogers but it can be attributed to the dip in the earnings this year due to the pandemic. As soon as the pandemic attenuates, the payout ratio is likely to revert toward 50%. Overall, the dividend of Rogers is not exciting but it's much more attractive than the average yield of the S&P 500.

Final thoughts

Rogers has exhibited fairly resilient performance amid the pandemic and is likely to grow its earnings next year thanks to the expansion of its 5G network, the return of its stores to normal business schedule and a steep increase in roaming revenues as soon as the pandemic subsides. However, the market already has priced part of the expected recovery in the stock and hence the stock is somewhat overvalued right now. Therefore, investors should wait for a meaningful correction of the stock, toward the low $40s, before initiating a position.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.