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The CEO Factor

By Chad Fraser on April 21, 2017

If you’re like most investors, you focus on the fundamentals when evaluating a stock: factors such as earnings, cash flow and revenue growth, price-to-earnings ratios, and competition.

And if you subscribe to Investing Daily’s Canadian Edge, you likely put dividend yields near the top of your list—as stocks with high and rising payouts are the service’s bread and butter.

All these things are at the core of solid stock-picking, of course. But there’s one thing that often gets short shrift: the human element.

Here, I’m talking about the CEO, the person who makes the big decisions and gets the plaudits when things go well—and the pans when they don’t.

We’ve seen how strong CEOs, such as Amazon.com (NSDQ: AMZN) chief Jeff Bezos or Apple’s (NSDQ: AAPL) Steve Jobs, can help drive their companies’ share prices higher over time.

And sometimes a change at the top can send a stock in a new direction entirely.

Arguably the most dramatic recent example is Microsoft (NSDQ: MSFT), whose stock fell 38% (split adjusted) during former CEO Steve Ballmer’s 13-year reign. But in the little more than three years since Satya Nadella took the helm, the software giant’s shares have soared 72%.

Granted, that’s not really fair to Ballmer, given that we’re still early in the Nadella era. But it’s something to consider as we turn our gaze to Canada’s telecom sector.

From One Telecom Giant to Another

On April 19, Joe Natale, the former CEO of Telus Corp. (TSX: T, NYSE: TU), took the helm of Rogers Communications (TSX: RCI/B, NYSE: RCI), the second-largest of the three main Canadian telecom companies by market cap.

The move was first announced last October, but a non-compete clause kept Natale from Rogers’ corner office until the two companies reached an agreement to let him start a couple months early.

The market’s initial reaction was muted, with Rogers shares edging up 0.6% on the day of the announcement last fall. But since then, the stock has been on a tear, rising 14.8%, faster than Telus, up 1%, and BCE (TSX: BCE, NYSE: BCE), the other major telecom player, with a 3% rise.

The question, of course, is whether the run still has legs. And that comes back to the human factor—Natale—and what magic he can work on his former adversary.

No doubt customer service was on Rogers’ mind when it hired Natale, and for good reason: He was responsible for Telus’ “Customers First” strategy, launched in 2010.

It worked. Over the next seven years, Telus’ monthly churn rate (i.e., the percentage of customers who cancel) among wireless users under contract declined from 1.6% to an industry-leading 0.95%.

That performance helped give its share price a big lift, up 166% during that time, the best return among Canada’s Big Three.

Rogers, for its part, saw churn rise from 1.06% to 1.23% over that same period. The company’s churn rate was 1.1% in the first quarter, but direct comparisons aren’t yet available, as we’re still awaiting results from BCE on April 26 and Telus on May 4.

However, much as we wish Natale well, we are, as mentioned sticklers for the dividend here at Canadian Edge.

And right now, Rogers’ 3.2% yield falls short of BCE, at 4.7%, and Telus, at 4.4%. The other two telcos also lead on the dividend-growth front, with Rogers’ payout up 21.5% over the past five years (in Canadian dollars), well below BCE (32.3%) and Telus (65.5%).

Moreover, Rogers’ quarterly dividend has been stuck at C$0.48 for the past two years, though the company has hinted that it could start increasing its payout again next year.

Finally, the stock’s run has left it trading at a premium to its peers, with a P/E ratio of 36.6, compared to 18.3 for BCE and 21.4 for Telus.

More Wireless Growth Ahead

That said, Rogers did a nice job of welcoming Natale, reporting first-quarter earnings this week that easily beat Bay Street’s expectations.

During the quarter, revenue rose 3%, to C$3.3 billion, matching the consensus forecast, while adjusted earnings per share jumped 33%, to C$0.64, topping the expected $0.57.

Wireless additions stood out, coming in at 60,000 new post-paid customers, well ahead of forecasts of 34,000.

That likely kicked off a strong year for Canadian wireless subscriber growth, according to Maher Yaghi, an analyst at Desjardins Securities.

In a note to clients quoted in the Financial Post on April 6, Yaghi based his optimism on factors such as steady immigration to Canada and room for further smartphone penetration.

The numbers bear that last point out: According to the Pew Research Center, 77% of Americans now own a smartphone, compared to 73% of Canadians, based on the latest numbers from the Canadian Radio-television and Telecommunications Commission.

A Trump Trade in the Making?

Finally, given the tightness of the Canada-U.S. economic relationship, it’s worth taking a quick look at how President Trump could affect Canadian telcos.

Right now, foreign ownership of a Canadian telecom company is capped at 46.7%, but that could change under a renegotiated NAFTA. In fact, we know it’s on the new administration’s radar, because it appeared on the U.S. government’s recently released annual list of trade irritants with other countries.

If so, it may open the door to more takeovers in the sector, which has already been on a consolidation streak. Stay tuned.


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