Sunday, February 14, 2016

Rogers Communications' Dividend Freeze - Sell, Buy, or Hold?

On January 27, 2016 while reporting their Q4 2015 results, Rogers Communications stunned investors and analysts by freezing their dividend. After annually raising their dividend for 11 years, Rogers' CEO, Guy Laurence indicated that the company was holding the dividend steady while they worked on lowering their leverage ratio (Total Debt / Equity = 3.1X at YE15).  Rogers' share price fell by approximately 8% from January 26th (pre-dividend freeze announcement) to January 28th as investors digested the dividend freeze. It is also note worthy that 3 of the first 5 questions management faced on their Q4 conference call related to the dividend freeze. Clearly, investors and analysts were caught off guard by Rogers' management decision to freeze their dividend. Given my own 'overweight' position in Rogers within my TFSA, I was among the stunned investors that had to quickly analyze my options. My thought process for evaluating my three options is outlined below.

Option 1 - Sell My Position

My knee-jerk reaction when Rogers announced their dividend freeze was to sell my position. While reading through Rogers' CFO answer to one analyst's question, I found myself particularly pissed off. The CFO indicated "Our value really comes from building a solid growing business rather than just a dividend play."  I took offense to the CFO implying that a "dividend play" was something negative, and refusing to acknowledge that many shareholders rely on Rogers to supplement their income. For the record, the value that I see in Rogers is creating a solid growing business in order to fund growing distributions to their owners. Every time the company steers away from their core business (telecommunications) in order to pursue management's media empire building fantasies (i.e. purchasing sports teams, overpaying for NHL broadcasting rights, etc.), I find myself looking to Rogers' competitors (BCE and Telus) as I fear my dividends from Rogers are being put in jeopardy.

Realizing that selling my position in Rogers would be based more on emotions than on fundamental analysis and facts, I held steady while contemplating my two other options.

Option 2 - Add To My Position

At its current price of ~$47.50, Rogers has a trailing P/E ratio of approximately 18X. For comparison purposes, Rogers' average trailing P/E ratio for 2013, 2014, and 2015 were 13.6X, 14.7X, and 18.1X respectively. Despite the pullback after announcing its dividend freeze, Rogers remains expensive based on their historic trailing P/E. Furthermore, as a dividend growth investor, I indicated in my 2016 goals that I only planned to add to my positions in companies who had increased their distributions in the past year. Since Rogers no longer meets that criterion, I decided that buying more Rogers was not an option for me to pursue.

Option 3 - Hold

After not letting my emotions get the best of me (selling), and quickly realizing that adding to my position was not in line with my investment objectives, I decided to hold onto my position in Rogers while management pursues de-leveraging. Using the S&P CapitalIQ estimates for Rogers' debt at YE16 (~$15B), free cash flow FY16 ($1.7B), and dividends for FY16 ($1B), my calculations have Rogers ending 2016 very close to their desired leverage ratio of 2.5X that they are looking to achieve before resuming increasing their dividend. If during the process of de-leveraging or after reaching the 2.5X leverage ratio management decides to do something out-of-line with their core business, I will look to sell my shares at that time.

In summary, I am in a "show me" mode with Rogers over the next year, as management has temporarily lost my trust. Considering a 5% dividend raise would have cost the company a relatively paltry $50M (compared to the cash flow numbers above), and management had numerous other options at their disposal to fund a dividend raise (i.e. selling non-core assets which have been rapidly accumulating over the last few years), I am hoping Mr. Laurence and his management team remember to serve their owners' best interests and not pursue their own media empire building dreams.







2 comments:

  1. Tough call DIH. I would probably stay still. This is usually the best option. Let us know what you have decided. Bon courage et bonne réflexion!

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  2. Merci Monsieur D! Je suis tenu mes actions Rogers...ils ont maintenant 1 an pour hausser le dividende...apres ca, je vais les vendre.

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