A falling share price can make a business look broken before you have opened the results. Sometimes the market spots trouble. Sometimes investors have simply run out of patience. Both can create a useful opening for someone with a longer calendar.
The difficult part is telling those situations apart. A company isn’t a bargain because its shares used to cost more. It becomes interesting when the cash supporting each share improves while the price asks less of future results.
That is the tension at Rogers Communications (TSX: RCI.B). Its latest quarter produced more free cash flow, while the stock remains well below where it ended last year.
Price and progress
Rogers closed at about $44 recently, compared with $51.81 on December 31. That’s a decline of about 14.8%, excluding dividends. So, what’s been going on?
The company operates wireless and cable networks alongside media and sports businesses. Customers keep paying for internet and mobile service, giving it recurring revenue. Competition can still force it to offer more service for less money, which is less enjoyable from the shareholder’s side of the bill.
Second-quarter free cash flow rose 6% to $982 million, the company’s cash measure after capital spending and specified other items, including financing costs. Lower capital spending helped deliver the increase. I welcome more cash, but cutting investment isn’t an endless growth strategy, and investors perhaps felt the same. The network still needs to work when customers all decide to stream hockey at once.
A useful dividend
Rogers maintained its $0.50 quarterly dividend, or $2 annually. At $44.15, that supplies a yield near 4.5%. Here’s what a $10,000 investment would therefore look like at the time of writing.
The purchase leaves $22.10 from a $10,000 budget before costs. Quarterly income would be $113 if the payment stays unchanged.
The dividend has been flat for years, so the appeal isn’t a record of recent increases. Instead, it offers steady income while the company works to improve its finances and the market decides whether the shares deserve a better price. For Canadian dividend investors, that creates a clear distinction. Current income can be useful even when dividend growth is waiting in the wings.
Debt gets attention first
Rogers’ debt leverage ratio was 3.8 times at June 30. The company also has substantial sports interests through Maple Leaf Sports & Entertainment, offering potential monetization opportunities. Those assets can be valuable, but an estimated sports valuation isn’t money available to repay bonds today. Shareholders need completed transactions and cash generation to do that work.
I like the prospect of using stronger free cash flow to reduce financial pressure. A less burdened balance sheet would leave more flexibility for future dividends, investment and periods of weak subscriber growth.
The risk is that competition keeps service growth subdued while debt remains expensive. Sports expansion also adds financial commitments, so a popular team doesn’t automatically produce a more attractive stock.
A patient purchase
I’d consider Rogers as a measured income holding at this yield, with debt reduction carrying more weight than hopes of a quick rebound. The next results are scheduled for October 23. The useful evidence will be whether cash generation remains healthy without starving the network, and whether financial obligations become easier to carry.
An eligible Tax-Free Savings Account (TFSA) can shelter dividends and gains when there is room. The stock still belongs in a diversified portfolio because a familiar monthly bill doesn’t guarantee a steady share price.
Bottom line
Rogers doesn’t need a spectacular comeback to reward patient buyers. Sustained cash generation and a lighter debt load could give the shares room to recover while the dividend supplies something tangible along the way.
