There’s not much to like about Rogers Communications (Rogers Communications Stock Quote, Chart, News TSX:RCI.B) right now, says Brian Madden.
The Canadian telecom space has always been a clear favourite for income-seeking investors, especially during times of economic volatility. But that logic doesn’t necessarily apply to the present situation, says Madden, senior vice president at Goodreid Investment Counsel, who thinks Rogers Communications may be the least attractive of the bunch.
Evidently, it’s been a strange time in the markets, with 2020 likely to be remembered for the pandemic-induced historic crash and recovery along with the meteoric rise of stocks like Zoom and Moderna, not to mention investor favourites like Amazon and Tesla.
But perhaps even more out of keeping with past patterns has been the relatively lacklustre performance of utility stocks, which in Canada has been most glaringly represented by the telecommunications names, including at the top Rogers, BCE and Telus.
A safe haven for decades and a place where investors have been able to count on a steady flow of income in the form of dividends, the current climate has been less supportive of Canadian telcos.
For 2020, BCE and Rogers are down six per cent and Telus is about even. That’s in contrast to telecom companies outside Canada, which generally have had better results. The S&P 500 Communications Services Index, which often stands as a proxy for the sector, is currently up 22 per cent for the year, handily outpacing the overall market.
And defensive they may be, Canadian names like Rogers just aren’t where it’s at right now. Madden argues they could do even worse once the economic skies clear up.
“Rogers is a fine company but it would not be our top pick in the telco space,” said Madden, speaking on BNN Bloomberg on Wednesday. “I should add that in our mainstream Canadian equity portfolios we don’t own any telcos right now.”
“Telcos are low-beta stocks and they’re generally speaking high-dividend yield stocks, although Rogers is less so than the other two,” Madden said. “This year, in particular, they’ve been seen quite rightly as defensive, work-from-home plays. Everybody’s been stepping up their data packages and their internet and their streaming and so they’ve been a beneficiary of that trade and money flow.”
“But with the election-related uncertainty dissipating and hopes about vaccine being widely available next year, I think some of the bloom may come off of that work-from-home trade and these stocks could be sources of money flows into more cyclical parts of the market,” Madden said.
The telcos had a bounce back quarter with their Q3 earnings delivered in October, as retail outlets reopened and companies saw growth in their wireless segments. Rogers managed revenue and earnings beats in its third quarter, delivering revenue of $3.67 billion compared to $3.75 billion a year earlier and a profit of $512 million compared to earnings of $593 million. Adjusted earnings were $1.08 per share. Analysts had been calling for revenue of $3.34 billion adjusted earnings of $0.78 per share.
The company saw a 34 per cent year-over-year increase in wireless postpaid net subscriber additions of 138,000 for the quarter, while free cash flow grew by 13 per cent to $868 million.
“After experiencing the most significant impact of COVID-19 in the second quarter, our results have recovered materially, although they are still down compared to last year,” Rogers said in the third quarter press release. “As a critical service provider during this time, it is of utmost importance to ensure our customers stay connected and that our customers and employees remain safe.”
Dividends for the top three Canadian telecom companies have been solid through the pandemic, with Rogers currently sporting a 3.3 per cent yield, Telus at five per cent and BCE at close to six per cent.
Of Canada’s top three telecom companies, Madden says he prefers Telus right now, both for its higher dividend compared to Rogers and its growth potential.
“I will say that in the telco space and in an income seeking mandate we run for an institutional client we own the other two telcos and we do have a preference for them because they have a higher yield,” Madden said. “And in the case of Telus, it’s got some interesting side ventures which remains small but are dramatically outgrowing their core wireline and wireless business, notably in home security and in virtual healthcare.”
“So, Rogers is okay but it would be third in our pecking order among the telcos, and none of the telcos are really getting us jumping up and down with excitement right now for total return,” Madden said. “They’re all respectable on income potential but not much capital gain is likely in our estimation in these three stocks in the medium term.”