Cogeco decided to climb Everest

Cogeco is a leading telecommunication and media company based in North America. The company operates through two subsidiaries – Cogeco Communications and Cogeco Media.

Its Cogeco Communications subsidiary 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. while its Media business owns complementary radio formats and coverage across the province of Quebec, as well as Cogeco News. Cogeco has two operating segments: Communications (95% of revenues) and Other (5%).

Canada is its largest market, accounting for nearly 75% of the company’s revenues while the U.S. constitutes the balance 25%. Cogeco owns an extensive and advanced network of communication infrastructure consisting of long-distance fibre optic systems, advanced hybrid fibre-coaxial broadband distribution networks, point-to-point fibre networks, and fibre-to-the-home network technologies.

It also owns and operates 23 radio stations across Quebec. Cogeco has been in business for the last six decades and is known for its diversified range of telecommunications and media products and services.

Investment Data
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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.

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 more than $1 billion in Quebec and Ontario networks over the next four years.

Cogeco is also focusing on launching its wireless services in Canada. Cogeco Connexion leveraged its superior Internet speeds and video services by continuing to expand its Gigabit offerings to reach approximately 60% coverage of its footprint. 

Cogeco introduced major video enhancements through TiVo platform, launched Amazon Alexa functionality and a mobile app for multi-screen viewing, and the migration to IP VOD. The company makes efforts to retain high-value residential customers and move business customers into long-term contracts.

Cogeco’s media business was negatively impacted by the COVID-19 pandemic as a majority of its radio revenue is generated from the retail industry which was significantly impacted by the crisis. Its communications segment’s revenue grew as a result of the American broadband services operations’ growth in both residential and business Internet service customers.

Cogeco was expecting FY 2020 revenue to grow between 2% and 4%, prior to the COVID-19 crisis, but has withdrawn its financial guidelines as a result of the pandemic. 

Dividends

Cogeco is a Canadian Dividend Aristocrat maintaining its double-digit growth history. It currently sports a dividend yield of more than 2% 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%. The company has maintained a dividend CAGR of 18% over the last decade.

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 Communications also acquired iTeract Inc. in southern Quebec, in this regard. This transaction represents the third acquisition of spectrum licenses by Cogeco in the last couple of years.

Cogeco is estimating free cash flow growth in the mid-single-digit percentage range. 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 and Telus are its largest competitors. Rogers Communications, Videotron, and Shaw Communications 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. Cogeco does not offer wireless services currently and the shift of traditional Internet and fixed phone customers from wireline services towards wireless is a big concern for the company. 

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:BCEBCEBCECommunication ServicesTelecommunication Services0.6155.2639.3321.9221.922.520.06036.031.321443.330.111368Tollbooth - RegulatedNOYESYESNOCanada1
TSE:TTTelusCommunication ServicesTelecommunication Services0.6026.5526.8625.3225.321.050.04694.691.185541.250.116677Tollbooth - RegulatedNOYESYESNOCanada1
TSE:RCI.BRCI.BRogersCommunication ServicesTelecommunication Services0.4360.8524.2719.1619.163.180.03293.290.628942.000.046624Tollbooth - RegulatedNONONONOCanada1
TSE:SJR.BSJR.BShaw CommunicationsCommunication ServicesTelecommunication Services0.4922.959.3617.4117.411.320.05165.160.8977121.190.051625Tollbooth - RegulatedNONONONOCanada1
TSE:QBR.BQBR.BQuebecor Inc.Communication ServicesTelecommunication Services0.5932.358.0414.6414.642.210.02472.470.362040.800.252864Tollbooth - RegulatedNONOYESNOCanada1
TSE:CCACCACogeco Cable IncCommunication ServicesTelecommunication Services0.6698.294.7112.8212.827.670.02362.360.302542.320.127877Tollbooth - RegulatedYESYESYESNOCanada1
TSE:CGOCGOCogecoCommunication ServicesTelecommunication Services0.7080.661.1610.1010.107.980.02362.360.238141.900.157477Tollbooth - RegulatedYESYESYESNOCanada1

Bottom Line

Cogeco is well-positioned to leverage its wireline network and customer base and offer more affordable choices to Canadians in the wireless services market. Cogeco’s excellent customer experiences and initiatives to accelerate digital transformation should go a long way in maintaining its future growth.

With that said, Cogeco seem to be going down the same path Shaw did. It’s not easy to break into the wireless business and it will require cash to compete. One difference is their focus on hard to reach area geographically and that might become profitable. The PE is low and the payout ratio is also low compared with the big players but it will need the cash for acquisition and marketing.

The wireless segment is hard to get in. Many have tried. Shaw started down the path and is going to poor money into it. The same will apply to Cogeco so the question is how long will they try and what does success look like?

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