Published June 11th, 2017 by Bob Ciura
Shaw Communications (SJR) is a rare stock. It is based in Canada, and is the only telecom stock with a monthly dividend.
Shaw is one of just 29 stocks that pay monthly dividends.
The other advantage for Shaw is that, while the two U.S. telecom giants are engaged in a costly price war, its growth is not being challenged.
Shaw is growing subscribers and revenue, which fuels its 4% dividend yield. And its impressive growth leaves the possibility for dividend increases moving forward.
This article will discuss Shaw’s business model, and why the stock could be an attractive option for income investors.
Shaw is a diversified telecommunications company. It operates in four segments:
Source: 2016 Annual Report, page 7
In terms of service revenue, Shaw’s segment breakdown is as follows:
- Consumer (76% of 2016 revenue)
- Wireless (6% of 2016 revenue)
- Business Network Services (11% of 2016 revenue)
- Business Infrastructure Services (7% of 2016 revenue)
The Consumer segment provides households with broadband Internet, Shaw Go WiFi, video, and digital phone. This is the largest segment, and generates the vast majority of Shaw’s annual revenue.
The Wireless business offers wireless voice and data services through the company’s expansive wireless network infrastructure.
Next, Shaw’s Business Network Services operations provide business customers with Internet, data, WiFi, video, and fleet tracking services.
Lastly, the Business Infrastructure Services segment, comprised of the ViaWest arm, provides hybrid IT solutions including colocation, cloud computing, security, and compliance for North American business customers.
The company has performed very well over the past two years. Revenue increased 9% in 2016, after a 6% increase the previous year.
Earnings per share soared 40% in 2016. This growth was largely the result of two significant strategic initiatives, an acquisition and a major asset sale.
First, in March 2016, Shaw acquired Wind Mobile for approximately $1.6 billion.
Source: Acquisition Presentation, page 4
It financed this acquisition through the sale of its media business to Corus Entertainment (OTCPK:CJREF) for approximately $2.65 billion. Shaw retained some of the value of the media arm by obtaining a significant equity stake in Corus.
The Wind Mobile deal allowed the company to expand its wireless product offerings, and also gave Shaw a significant increase in spectrum. It also delivered scale benefits to the company, which contributed to Shaw’s huge earnings growth last year.
The deal was a much quicker way for Shaw to enter the Canadian wireless market than would have been possible by building out its own network infrastructure.
Going forward, there is plenty of growth potential for the company up ahead.
2016 was a great year for the company, and 2017 is shaping up to be another highly successful year. In Shaw’s fiscal second quarter, the company experienced its best consumer subscriber numbers at any point in the past five years.
Subscriber losses of 5,000 were down significantly from 41,000 in the same quarter last year. The modest decline was more than offset by subscriber gains in other areas.
For example, Shaw gained over 33,000 prepaid and postpaid wireless subscribers last quarter. This helped fuel 13% revenue growth to $1.3 billion. Adjusted operating profit grew 8% for the quarter year over year. Free cash flow increased 24% last quarter.
Going forward, the continued integration of Wind – now called Freedom Mobile – should provide considerable growth. Expanding further in wireless allows Shaw to combine its fiber, WiFi, and wireless networks.
Source: Acquisition Presentation, page 13
In addition, a separate growth catalyst for Shaw’s earnings is the potential divestment of the ViaWest business. This is a part of the company’s Infrastructure Services segment.
A divestment could potentially help Shaw, because it would allow the company to return to its core competencies, which are its other three operating segments.
Plus, it is likely Shaw would receive a hefty price for ViaWest, due to the rapid growth in data center demand over the past several years.
Overall, the company expects adjusted operating income in a range of $2.125-2.175 billion, and free cash flow is expected to top $400 million.
Shaw’s current monthly dividend rate is approximately $0.098 per share in Canadian dollars. On an annualized basis, this comes out to roughly $1.19 per share. Of course, investors should consider that since Shaw is based outside the U.S., the dividend is exposed to currency risk.
The dividend rate is subject to change, once it is translated back into U.S. dollars. Based on prevailing exchange rates, Shaw’s dividend comes out to approximately $0.88 per share in U.S. dollars.
On June 8th, the stock closed at a share price of $21.30, which means Shaw has a dividend yield of 4.1%.
Another important consideration for investing in foreign companies is withholding taxes. Dividends received in Canadian dollars are typically subject to a 25% withholding tax. However, there is an exception for Canadian stocks – the withholding tax is waived for U.S. investors who hold the stock in a qualified retirement account, such as a 401(k) or IRA.
From a sustainability standpoint, Shaw’s dividend appears to be secure. The company had earnings per share of $2.51 in Canadian dollars last year. In U.S. dollars, earnings per share were $1.86 per share.
As a result, Shaw’s payout ratio is 47%, based on 2016 earnings per share. Distributing less than half of earnings is a very healthy payout ratio, which leaves plenty of room for future dividend increases.
When investors think of telecoms, they likely think of AT&T and Verizon. These are both very strong dividend stocks, but there may also be strong telecom stocks outside the U.S. that are worth considering.
Shaw has a strong business model, growth potential, and generates more than enough cash flow to sustain – and grow – its 4% dividend yield.
Plus, Shaw gives investors the added bonus of dividend payments each month.