Friday, August 14, 2015

Recent Buy: Corus Entertainment Inc.

When I sold my shares in H&R REIT earlier this year in my unregistered account, I realized that I didn’t have enough capital losses to completely avoid capital gains on the sale. Since tax avoidance is a major pre-occupation of mine living in the province with the highest personal tax rate in Canada (vive le Quebec!), I’m currently in the process of tax loss harvesting using my holdings of Corus Entertainment. Earlier this week, I established a position in Corus in my TFSA. Now, I will wait at least a month before selling the same sized position in Corus that I currently hold in my unregistered account. This will allow me to lock in a capital loss that I can use to offset capital gains in my unregistered account.

Corus operates 39 radio stations and numerous specialty television channels in Canada. Since being spun-off of Shaw Communications in 1999, the company grew its revenues from $160M to $830M organically and through acquisitions. Along the way, Corus has become a Canadian Dividend All-Star by raising its dividend yearly over the past 12 years. The last increase was 4.6% in January 2015. Corus pays its dividend on a monthly basis.

Sounds like smooth sailing right? Last March, the regulatory body for radio and television in Canada, the CRTC decided that Canadians would be given more selection, and less bundled services as part of the basic cable package. This likely means a couple of Corus’s channels that are subsidized as part of the basic cable package in Canada will no longer be included. The CRTC decision, along with ongoing week revenues in the television and radio advertising segments have pushed Corus’s shares down almost 50% from their 52-week high of $25.45 to about $13 currently.

I’m a sucker for dividend growers trading near 52-week lows, and the added advantage of allowing me to lock in a capital loss was simply too much to pass up. Before buying a position in my TFSA, I took a look over the recent financials to see if Corus’s dividend level (current yield is in excess of 8%), was sustainable.  Here are some reasons why I felt comfortable buying Corus near its 52-week low.
-          Corus has a number of very strong television channels that I feel most Canadians who purchase a cable package will still be interested in. Notably, YTV, Teletoon and the Disney Channel Canada are popular with kids.  The W Channel and the Oprah Winfrey Network Canada are well known and contain interesting programming.
-          Over the past twelve-months, during which time advertising revenues were stagnant in Corus’s two main segments (television and radio), the company still generated free cash flow of about $140M, while paying out only $73M in dividends.
-          S&P continues to rate the company’s debt as BB+/Stable (one notch below investment grade) and indicates the Corus’s liquidity is “adequate”. Interestingly, S&P expects the company to raise dividends in the 2-3% yearly range going forward.
-          While reading the transcript from the latest quarter’s results call, I noticed how upbeat management is about Corus’s prospects, indicating they feel the stock market has misinterpreted the CRTC’s decision potential impact on the company. Additionally, management was very excited about launching the Disney Network Canada this fall.

When I sell my shares of Corus in my unregistered account in September, I’ll likely sell a small number of shares I also hold in my RRSP, effectively cutting my position in Corus from overweight to a half position. This will allow me to watch from the sidelines to see how the CRTC’s decision is implemented, and its impact on the company.  I’m cautiously optimistic that management’s interpretation of the CRTC decision will be more accurate than the market’s negative over-reaction.

Would you invest Corus currently given the uncertainty regarding the company?  

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