Telecoms as a sector have lagged the S&P 500 on the recovery since the crash in early March. Shaw Communications (SJR) out of Calgary, Alberta up in Canada has even lagged the sector on top of that. Shaw released Q3 earnings on Friday, and beat on both earnings and revenue. The stock rocketed up 5% after hours on the release. This is quite the move for a stock that is not very volatile. Shaw pays out a very stable, and healthy dividend that is hard to match, and there may be some capital gains to be had as well as the stock plays catch-up.
*All $ listed in Canadian dollars unless otherwise stated*
How Were The Earnings?
Taking a look at some of the highlights from the call, we saw that:
- Q3 GAAP EPS of $0.35 beats by $0.05.
- Q3 Revenue of $1.31B beats by $50M, but down 0.8% year over year.
- Adj. EBITDA for the quarter improved 15.3% year over year to $609M as it included the impact of IFRS 16 in FY20.
- During the quarter, wireless postpaid net additions increased by ~2,200 while postpaid churn was a record low 0.96%, primarily due to reduced customer activity.
- Despite low wireless subscriber activity, ABPU and ARPU grew Y/Y by 5.7% and 2.6%, respectively.
There is no question COVID-19 had its impacts and I’ll touch on those in a bit, but it did lead to some positives as well for the company. Looking at the fibre plus network, Shaw saw traffic increase as much as 50%, but there was no increase in congestion or material outages, much in part due to their investments over the years spent on developing the strong network. Keeping up with their competitors, they also launched a new even faster internet service in the midst of COVID-19. Looking at revenue, they did lose year over year, but this can be attributed to a loss in sales of equipment due to COVID-19. If you remove equipment from the equation, revenue is actually up 1.4% year over year.
Bradley Shaw, CEO wrapped up the call with this statement:
While it is still too early to predict with a high degree of accuracy, the magnitude of the COVID related impacts on our business. We continue to believe that the telecom sector is fundamentally strong and resilient. Under the most difficult and challenging set of circumstances, our network performance was exceptional, and we delivered better-than-expected results.
All in all a very good quarter when measured up against what was expected. Let’s take a look at some of the headwinds that remain.
What Are The COVID-19 Effects?
As mentioned earlier, Shaw was not immune to the effects of COVID-19. Many of their Shaw Business customers had asked for their service to be suspended as the shift moved to work from home for many businesses. As Canada looks to return to some sort of normal, some of these accounts are coming back online finally, which will help aid revenue in Q4. In the earnings call, their low market share of business customers came up.
Shaw said that they will be looking to gain more market share as companies look to cut costs. They are viewing this as an opportunity to steal some customers from their competitors as the economy reopens. COVID-19 has brought on the lowest postpaid churn to a record 0.96%. Even though a large part of the wireless retail network is back open for business, Shaw has not seen customer activity and store traffic return to previous levels. Much like all other retailers, no one is really sure when this will occur. Most are waiting for a vaccine to restore shopping habits.
How’s The Dividend?
One of the only reasons to have held Shaw over the past few years would be the dividend. Paying out currently 5.25%, or $0.098542 a share on a monthly basis. In terms of how this compares to the market, as you can see below, this is almost as good as it gets.
Shaw has a very strong dividend history as well. This can be seen below. I don’t doubt that Shaw wants to increase the dividend once again, something we haven’t seen since 2016. But, as you can see, analysts aren’t expecting there to be an increase any time soon. For there to be an increase, the share price would likely have to see a sharp increase, which would be driven by sharp revenue growth.
Dividend increases are great, but proper management of an already very healthy dividend is more important. Looking at where the company stands right now, they are facing a 93% payout ratio, which is on the high end, but still manageable. Looking below, we can see this is expected to fall over the next three years as earnings should increase and get back on track. In order to see an increase, I believe this number has to get back to around 50%. It does not make any sense to rush into paying a higher dividend only to put stress on the balance sheet.
Shaw is not going anywhere, and their dividend is here to stay unless there are further unforeseen impacts from COVID-19 in the Canadian market. Shaw has done an excellent job of establishing and maintaining itself as a strong dividend company.
What Does The Price Say?
One of the things that are appealing about Shaw right now, outside of the great dividend, is how much it has lagged both the sector and the market during this recovery. (This is as of Friday, and these earnings could catch up with the sector really quickly.) Looking below, we can see exactly where they stand.
We can see that the Telecoms have really lagged on the recovery as a whole, especially for how well they traced each other on the way down. There is no doubt that there are fundamental issues with the industry thanks to COVID-19, but the entire economy is facing similar issues. I would not expect the underperformance of this magnitude to continue.
Looking at some of the technicals for Shaw on its own, I have a short-term price target of about $17.75. Looking below we can see that the stock has been trading in a fairly tight range for a while now. Starting with the top end, I believe we will retest the top white line mostly on earnings drift alone. A breakthrough here should help us fill that gap created on June 11th that I have circled which takes us to $17.75
Looking at the possible downside, If I were to buy this stock for anything more than just the dividend, I would have a stop of ~$15.71. Looking below we can see why. There is some serious support at this level. Looking back to March, we can see this was the level that held before the massive gap down which is circled. This level eventually recovered and has been tested several times, with a quick shake out of loose hands in mid-May.
As you can see, there is a lot to like about Q3 for Shaw. These results may cause some positive drift in the stock for some capital gains, but the real play here is the dividend in my opinion. You may see 10% or so in gains in the share price over the next little while as the stock looks to catch up, but the real winner is the dividend. This is one to tuck away and enjoy the 5%+ returns while the stock figures out what it wants to do. There is nothing like getting paid to wait! Stay safe out there!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.