Dial Back on Some of the Canadian Telcos

Earlier this week, Rogers v. Rogers by the Globe & Mail’s Alexandra Posadzki was released. It chronicles all the drama you would expect to find in a family business. Rogers Communications (“Rogers”) is dual listed. In other words, it has Class A voting shares and Class B non-voting shares. 

Prior to his death in 2008, Ted Rogers created a structure that would allow a group of close family and friends (called the “Rogers Control Trust”) to control the voting rights over the company. And with 97.5% control over the Class A stock, it does!

Ted compared the structure to that of the U.S. Congress, and what a mess it has created. Since 2009, each CEO of Rogers (Nadir Mohamed, 2009-2013; Guy Lawrence, 2013-2016; and Joe Natale, 2017-2021) have reportedly clashed with someone from the Rogers family for one reason or another. One person tried to introduce an organizational chart without any sight of the last name “Rogers”; another sought to brashly change the company too soon after arriving; and the other one simply lost the confidence of Ted’s son, Edward Jr., who happens to be the Chair of the Rogers Control Trust and directs its voting decisions. Two of these three CEOs were unceremoniously dismissed in a very public manner.

Governance should be discussed more often by investors. Internal dissention, such as the structure that exists at Rogers, is surely a distraction that prevents the board of directors and its CEO from executing strategy. Having a shadow board looking over its shoulders and second-guessing its decisions has a recipe for conflict.

For anyone employed at Rogers and looking for a change, now is perhaps not the best time to send your resume to BCE. It just announced its slashing 9% of its workforce, or 4800 positions. And that’s in addition to the 1300 positions that were cut just last June. While many have been notified, others won’t find out their fate until the spring. We don’t foresee any earnings growth at BCE at all between 2023 and 2025. That being said, there’s only two reasons to hold this stock: (1) its dividend yield is 7.8%, and (2) there will be multiple expansion on the stock’s valuation as interest rates fall later this year. 

The only telco we would buy today is Telus. Sure, BCE has a 7.8% dividend yield (albeit no earnings growth), but Telus pays 6.3% and its earnings will grow by almost 10% in 2024. In case you’re wondering, Rogers pays a 3.2% dividend yield and its earnings should grow almost 7% this year.

In May 2011, Telus announced a dividend growth program. Since then, the quarterly dividend has increased 25 times, amounting in $12.38/share in total dividend payments since then. Each year for the last 5 years, Telus has increased its dividend by a larger percentage than BCE every year (Rogers’ dividend has been on hold since 2019). We fully expect another 3-5% dividend hike from Telus in the spring.

Telus isn’t hindered by the poor corporate governance at Rogers or the lack of growth at BCE. Instead, the company offers a blend of earnings growth, a history of enviable dividend hikes, and a very strong income return for its shareholders.

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