Cogeco is a hidden performer

Cogeco is a leading telecommunication and media company based in North America. The company operates through two subsidiaries – Cogeco Communications and Cogeco Media. Cogeco Communications provides residential and business customers with Internet, video, and telephony services in Quebec and Ontario, under the Cogeco Connexion name, and under the Atlantic Broadband brand in the U.S.

Cogeco owns and operates a strong network of radio stations across Quebec through its subsidiary Cogeco Media which is the No.1 radio broadcaster in Quebec. Cogeco has two operating segments: Communications (95% of revenues) and Other (5%).

Canada is its largest market, accounting for nearly 55% of the company’s revenues while the U.S. constitutes the balance 45%. Cogeco owns an extensive and advanced network of communication infrastructure consisting of long-distance fiber optic systems, advanced hybrid fiber-coaxial broadband distribution networks, point-to-point fiber networks, and fiber-to-the-home network technologies.

Cogeco has been in business for the last six decades and is known for its diversified range of telecommunications and media products and services.

• Opportunity Score: 68
• Ticker: TSE:CGO
• Sector: Communication Services
• Industry: Telecommunication Services
• Market Cap: 1.40B
• P/E: 11.36
• Dividend Yield: 2.24%
• Payout Ratio (Earnings): 25.44%
• Canadian Dividend Aristocrat: YES
• Chowder Score: Members Only
• Revenue Growth: Members Only
• Dividend Growth: Members Only
• Dividend Growth Fit: 7/10
• Dividend Income Fit: 7/10

Revenue Growth & Market Exposure

Cogeco’s subsidiaries are leading diversified businesses in North America. Its Communications business has strong Canadian cable operations and provides stable growth and high operating margins while its media business owns and operates 22 radio stations throughout the province of Quebec and one in Ontario with 4.8 million listeners/week.

The company continues to undertake various transformational projects to provide greater flexibility to its subsidiaries in pursuing organic investment and acquisition opportunities. For instance, Cogeco Communications is committed to investing ~$450 million every year to increase high-speed Internet connectivity, especially in rural and unserved areas. Cogeco Communications is already delivering 1Gig Internet speeds in 75% of the Canadian footprint and over 90% of the U.S. footprint.

Cogeco continued the expansion of the 1 Gig offering while enhancing the service and product offering and end-to-end digital experience. It also introduced the IPTV entertainment system at the end of FY2020, which will be rolled out in FY2021. The company makes efforts to retain high-value residential customers and move business customers into long-term contracts.

It incurred higher capital expenditures in the American broadband services segment driven by increased demand for high-speed Internet and network infrastructure investments in Florida.

Cogeco witnessed a 4.5% revenue growth in the latest quarter, driven by growth in the American and  Canadian broadband services segments but a decline in media business resulting from the COVID-19 pandemic. The media business revenue experienced a decline of 13% in the latest quarter but it improved from a 29% decline in the earlier quarter.

Cogeco Media continued to manage its operating expenses tightly. As of November 2020, 68% of the Canadian and 49% of American broadband services customers subscribed to Cogeco’s double play or triple play bundled services. The company expects revenue growth in the mid to high single-digit range for FY 2021.

Dividends

Cogeco is a Canadian Dividend Aristocrat maintaining its double-digit growth history. It currently sports a dividend yield of more than 2.3% and a payout ratio of ~24%. A low payout ratio represents significant room for expansion and that the management is reinvesting in future growth opportunities. The company has a solid history of giving high returns to shareholders. Cogeco last increased its dividends by more than 10% in 2019. The company has maintained a dividend CAGR of 18% over the last decade. It did not renew its NCIB program.

Cogeco has a sound track record of attractive margins, strong free cash flow, and dividend growth. The company is optimizing its cost structure and operational effectiveness by exploiting group synergies. It continues to expand its footprint and increase its market share in current segments.

The company earns diversified revenues from communications and media businesses. Its radio operations, access to the Internet, video, and telephony services were considered essential services during the lockdown. Cogeco increased its network capacity during this time. The company is looking at launching its wireless service across Canada focusing on the underserved regions. 

Cogeco’s free cash flow registered a growth of 36% YoY driven by higher EBITDA and a decrease in the acquisition of property, plant, and equipment in the Canadian broadband segment. The company expects its free cash flow growth in the high single-digit digit range and adjusted EBITDA growth in the mid to high single-digit range for FY 2021. Growing demand for data and communication infrastructure should act as a tailwind for the company.

Competition

The industries in which Cogeco operates are very competitive. The company faces competition from several large integrated communications service providers and Internet resellers.  BCE Inc. and Telus Communications are its largest competitors. Rogers, Videotron, and Shaw are also actively marketing their wireless telecommunications services in Cogeco’s footprint.

Cogeco competes with direct broadcast satellite providers, DirecTV, Inc. (owned by AT&T) and Dish Network in the U.S.

Bottom Line

Cogeco is the second-largest cable operator in Quebec and Ontario and the ninth largest cable operator in the U.S. The company is well-positioned to gain from ongoing demand for high-speed offerings as customers now spend more time at home for work, online education, and entertainment purposes due to the pandemic.

Cogeco’s continuous innovation and investment in product enhancements and service improvements, and digital transformations should help the company achieving its revenue, EBITDA, and FCF targets in FY2021.