Why I'm Buying this Underfollowed Telecom
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For the third trade I’m recommending for my “No Drip, No Mess” Portfolio I am going north of the border for a Canadian Telecom that has a diverse set of businesses and pays a great dividend. Instead of just buying the stock, I’m recommending writing puts to pick up some income today while attempting to pick up shares at a ridiculously low price. Given its current price it might take a few tries to get shares, but the puts pay fairly well and we can use all the options income to buy one of the growth stocks on my watch lists.
The Company
I have to admit, the real reason I first added Rogers Communications (NYSE: RCI) to my personal portfolio was that they owned my favorite Major League Baseball Team, The Toronto Blue Jays. At the time I bought a handful of shares just to say I owned part of the team, I never really viewed Rogers as a core holding because they had a lot of debt and paid a very small dividend.
But over time they’ve done a great job at cleaning up the balance sheet and have been really boosting their dividend so that today shares yield a very generous 4.75% and they’ve improved so much that they make an excellent long-term investment.
In addition to my beloved Jays, Rogers owns the Rogers Centre where the Jays play, as well as a piece of the Maple Leafs, the Raptors and the Air Canada Centre along with several sports networks in Canada. However, these Canadian sports businesses are just the tip of the iceberg for this telecom and communications giant. Rogers also has business segments in fixed line and mobile telephony, internet services, digital television and radio. Think of them as Verizon (NYSE: VZ) meets Comcast (NASDAQ: CMCSA) and a sprinkling of Madison Square Garden (NASDAQ: MSG).
Like Verizon they have a slowly dying fixed line business but a booming mobile business that is helping to drive their cash flow. Much of their wireless operations is being driven by increased smartphone penetrations from the likes of the Apple iPhone. Their subscriber base has gone from 41% smartphone subscribers to 56%, which has helped wireless revenue to climb 2% while overall subscribers have fallen 7% thanks to increased competition. The prepaid side was especially weak, slumping 69% last quarter. But users of the iPhone as well as other smartphones are more valuable than prepaid subscribers so Rogers is getting a better, more stable revenue base.
The Comcast comparisons can be seen in both their cable operations and in how Comcast is acquiring content via its recent purchase of NBCU. Rogers increasingly owns more of the content, which has helped boost revenue from cable operations by 3% the last quarter. As I mentioned, Rogers doesn’t just own the cables and wires to get content to customers, nor do they just own the broadcast stations that create the content ... they own the sports teams and venues that generate the content on the field. Much like Madison Square Garden, which not only owns that namesake venue but also the NY Knicks and Rangers who play there, Rogers own the teams, the venues and the broadcast stations. I really like this vertical integration as it gives them such an advantage over other providers who must pay them every step of the way. Bottom line is that Rogers has some irreplaceable assets to keep their customers happy, which will continue to drive both revenue and profits for years to come.
The Trade
To add Rogers to the portfolio we could simply buy the stock collect its 4.75% dividend and be done with it. However, given the current market volatility there is an opportunity to pick up shares much cheaper or earn a very fat premium for trying. For the portfolio I am going to write October $30 puts for around a dollar. This gives us 3.3% yield on our cash required to hold the trade open as well as the opportunity to scoop up shares for just over 11% cheaper. If we are able to get those shares the going forward dividend yield would be over 5.3%. Come mid-October if we are not put the shares I’ll look to re-up the trade at $30 or go up to $35 a share if the premiums are worth it. While I’m not looking for a home run out of Rogers, I am looking for some steady income and a long-term winner in the portfolio.
latimerburned owns shares of Rogers Communications (USA), Verizon Communications and Apple and has the following options: Bull Call Spread on Apple. The Motley Fool owns shares of Apple and Madison Square Garden. Motley Fool newsletter services recommend Apple and 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.If you have questions about this post or the Fool’s blog network, click here for information.
