Buy Shaw Communications for capital gains and rising dividends

Shaw Communications (TSX—SJR.B) provides broadband cable television, high-speed Internet, home phone, telecommunications (through Shaw Business), satellite direct-to-home services (through Shaw Direct), and programming content (through Shaw Media). The latter operates one of the largest conventional networks in Canada, Global Television. Shaw Media also operates 19 specialty networks including HGTV Canada, Food Network Canada, History and Showcase.

Shaw is expected to earn more in fiscal 2014 and fiscal 2015 (fiscal years end August 31). This could raise its share price. The company pays monthly dividends that yield over four per cent a year. What’s more, it’s a ‘dividend aristocrat’ having raised its dividends for 11 years in a row. Shaw remains a buy for long-term gains as well as high and rising dividends.

In the nine months to May 31, Shaw reported net income of $695 million, or $1.44 a share. This was up by 3.6 per cent from $667 million, or $1.39 a share, a year earlier.

In the first nine months, Shaw’s revenue rose by 2.1 per cent, to $3.978 billion. Revenue climbed by 3.3 per cent in the Cable division. This was thanks to higher prices and growth in Shaw Business.

Revenue grew by 2.7 per cent in the Satellite division. This reflected higher prices. Revenue declined by 1.1 per cent in the Media division. Shaw writes that this was “primarily due to reduced advertising revenues partially offset by increased subscriber revenues as well as the favorable impact of a retroactive adjustment in the first quarter of the year related to distant signal retransmission royalties.”

While revenue rose, regular costs declined

In the first nine months, all regular operating and financing costs as a group declined by 0.7 per cent, to $3.02 billion. We’ve excluded restructuring costs of $53 million this year versus nothing last year. We’ve also excluded one-time items such as gains on the sales of assets. Higher revenue and lower regular operating and financing costs raised Shaw’s pre-tax income by 11.2 per cent, to $952 million.

The higher underlying earnings are confirmed by Shaw’s much higher cash flow. In the first nine months, it generated $1.132 billion. That’s up by 19 per cent from $951 million a year earlier. Even better, the cash flow exceeded net capital investment of $804 million and dividends and distributions of $280 million. The company used its cash flow to reduce its debt by $184 million in the first nine months.

Lower debt and higher cash flow has improved Shaw’s balance sheet. Subtract cash of $496 million from debt of $4.688 billion and its net debt is $4.192 billion. This is under 2.7 times the company’s cash flow of $1.561 billion over the latest four quarters. This is manageable as Shaw generates stable recurring monthly revenue from many customers.

Shaw has updated its ‘guidance’. It writes, “The Company expects consolidated revenue and operating income before restructuring costs and amortization growth, after adjusting for net impact of fiscal 2013 acquisitions and disposition activity, to range from 2% to 4%.” It also expects to face slightly lower capital investment but also higher cash taxes. It expects its free cash flow to exceed $650 million.

In fiscal 2014, Shaw is expected to earn $1.76 a share. That’s up by eight per cent from $1.63 a share last year. Next year, which starts on September 1, the company is expected to earn $1.85 a share.

Shaw is diversified and operates in the fastest-growing region of Canada. It remains a buy for long-term share price gains as well as high and increasing dividends.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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