4 Canadian Communications Stocks from Morningstar Canada Dividend Target 30 Index

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many analysts expect the Canadian stock market to outperform the U.S market this year. According to Glushkin Sheff & Associates’ chief strategist David Rosenberg, the Canadian market rests on a firmer macroeconomic footing than its neighbor, the United States, which could be a basis for the strong performance of Canadian equities in the long run. Income investors seeking exposure to Canadian dividend stocks can choose from among several equity issues listed on the U.S. exchanges. There are also index products and ETFs that track them, representing pools of Canadian dividend stocks with specific qualities, such as consistent dividend growth (e.g. S&P/TSX Canadian Dividend Aristocrats Index) or high scores based on a combination of criteria (e.g. Morningstar Canada Dividend Target 30 Index).

We take a look at the latter index, which is developed by Morningstar, a fund research company. Morningstar applies a proprietary model to select 30 Canadian stocks based on the scores that reflect the companies’ underlying qualities and growth potential. The index includes the companies that have the highest scores based on a combination of factors, including dividend yield (33.3% of the score), cash-flow-to-debt ratio (20%), return on equity (20%), five-year normalized EPS growth (13.3%) and 90-day consensus EPS estimate revisions (13.3%). Here is a closer look at four communications stocks from among the Index’s top 10 holdings that trade on the U.S. exchanges. These stocks offer attractive yields and boast stable business profiles with sustained earnings power, which makes them candidates for Canada-exposed dividend portfolios.

Rogers Communications (NYSE: RCI), a wireless, cable and media company in Canada, has a dividend yield of 3.5%, payout ratio of 55%, and long-term annualized dividend growth of 36.4%. The company’s dividend yield is slightly below its industry’s average yield. The company has a cash-flow-to-debt ratio of 0.38, based on operating cash flow and long-term debt. Its trailing-twelve-month ROE is 40.5%. The company’s annual EPS growth averaged 18.7% over the past five years and is expected to average 8.0% for the next five years. The consensus 2013 EPS estimate revision is positive 0.3% over the past 90 days. The stock is trading at 14.4x trailing and 13.8x forward earnings. RCI is enjoying a comfortable position in the Canadian communications market, but competitive pressures are intensifying as more companies enter the wireless market and Bell Canada, a subsidiary of BCE Inc. (BCE), expands in the cable and IPTV segments. The stock has a price-to-book of 6.6, well above the industry and historical metrics. Based on the last-available 13-F filings, the stock was one of billionaire Ray Dalio’s new positions in the third quarter of 2012.

Shaw Communications (NYSE: SJR) is another communications company, providing broadband cable television, Internet, home phone, telecommunication, and satellite direct-to-home services. It has a dividend yield of 4.3%, payout ratio of 60%, and five-year annualized dividend growth of 3.9%. The company’s cash-flow-to-debt ratio is 0.22, based on operating cash flow and long-term debt. Its trailing-twelve-month ROE is 21.7%. The company’s annual EPS growth averaged 12.7% over the past five years and is expected to average 4.0% for the next five years. Over the past 90 days, a revision of the consensus August 2013 EPS estimate is positive 3.8%.

In the first quarter of fiscal 2013, the company’s sales rose 3.1% year-over-year, while GAAP net EPS was up 14.0% on the same basis, surpassing analyst expectations. While the company’s basic cable subscriber count is slightly down, the number of Internet and digital phone subscribers is rising. The company has just hiked its quarterly dividend by 5.0% and has entered into an asset purchase and sales agreement with Rogers Communications. SJR is trading at 14.1x trailing and 14.8x forward earnings. SJR’s price-to-book of 2.7 is lower than the industry’s 4.4 and the stock’s five-year average of 3.2. At the end of the third quarter of 2012, among hedge funds, Daniel Bubis (Tetrem Capital) held the largest stake in the stock.

TELUS Corporation, a telecommunications company, has a dividend yield of 4.0%, payout ratio of 65%, and five-year annualized dividend growth of 16.1%. The company has a cash-flow-to-debt ratio of 0.59, based on operating cash flow and long-term debt. Its trailing-twelve-month ROE is 15.9%. The company’s EPS grew, on average, by 2.7% annually over the past five years and should accelerate to an average rate of 8.9% annually for the next five years. The consensus 2013 EPS estimate revision is negative 0.9% over the past 90 days. The company is one of the three leading Canadian wireless operators. The company’s wireless and wireline data operations have registered strong performance, boosting revenue and EBITDA growth and leading to improvements in free cash flow. The company is trading at 17.0x trailing and 15.7x forward earnings. Its price-to-book is 2.6, above the five-year average of 2.0 and the industry average ratio of 1.6. Alpine Associates’ Robert Emil Zoellner was especially bullish about the stock in the third quarter of 2012.

BCE Inc. (NYSE: BCE), a communications company providing wireline, wireless, Internet, and TV services, has a dividend yield of 5.2%, payout ratio of 73%, and a five-year annualized dividend growth of 16.4%. The company’s cash-flow-to-debt ratio is 0.43, based on operating cash flow and long-term debt. BCE’s trailing-twelve-month ROE is 24.4%. Its annualized EPS growth averaged negative 6.5% over the past five years, and is expected to rebound to an average rate of 1.6% per year for the next five years. The consensus 2013 EPS estimate revision is negative 3.0% over the past 90 days. The company promotes itself as a business with “unmatched asset base and broad suite of utility-like product offerings.” It is a market leader in voice, data, high-speed Internet and digital television and is the second largest player in wireless. It has a dividend growth model with a targeted dividend payout ratio of 65% - 75% of adjusted EPS. The stock is trading at 14.1x trailing and 14.0x forward earnings. Its price-to-book is 3.3, double the industry average and well above the stock’s own five-year average of 2.6. According to the last-available 13-F filings, fund managers Louis Navellier and Jim Simons boosted their stakes in the stock in the third quarter of 2012.


This article is written by Serkan Unal and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Rogers Communications (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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