Canada does not have much variety when it comes to telecom providers. Like our banks, this sector is heavily regulated, and it has produced a kind of oligopoly with very high legal barriers of entry. While BCE (TSX: BCE)(NYSE: BCE) gives you a better dividend yield, there are other factors at play that make a stronger case for owning Shaw Communications (TSX: SJR.B)(NYSE: SJR) for the future.
A better operator
Shaw’s management team is executing better with stronger margins across the income statement. Last quarter, it managed to post an EBIT — earnings before interest and taxes — margin of 31.5% compared to BCE that stood at 22.2%. This is a big difference that reflects itself further down in the income statement with a net income margin for Shaw Communications of 16.3% over 12.7% for BCE. While these percentages might not seem relevant when taking into account that BCE is three times the size of Shaw, it shows that there is much more room for this small player to grow. Both these high ratios can be explained in part by the fact that Shaw Communications posts a return on assets of 9.8% almost twice as much as BCE.
A stronger balance sheet
Shaw is less levered than BCE with only 96.2% of total debt to equity meaning that it has more options in case it ever wants to increase its capital expenditures in order to expand its service offering. The telecom sector is one where a ratio of total debt-to-equity near 100% is the norm rather than the exception. It is expensive to build a telecommunication network and it has some barriers to entry for potential new participants. EBITDA for Shaw is more than enough to cover the interest expense.
Shaw Go — the ace in the hand
Shaw’s management team was thinking outside the box when it launched its Shaw Go service three years ago and many Bay Street’s analysts were skeptical of the new strategy. Fast forward to today and it is clear that in a sector where competition is fierce, and consumers are not the most loyal, having free Wi-Fi for your smartphone and tablet wherever you are at no extra cost is a nice differentiator when choosing your cable company.
When you think about it, it is genius. It not only allows Shaw to offer additional value over BCE, but it also steals clients from Telus by allowing customers to bypass Telus LTE network. If the company can deliver a reliable Wi-Fi network countrywide, expensive data plan contracts with wireless carriers would be in great danger, and the value of being a Shaw client would go up tremendously.
In the end, BCE might pay you a higher dividend, but Shaw Communications is offering growth. As an investor, I am more than willing to accept a small percentage cut on my dividend yield if I get to partner up with dynamic management. The potential of owning a much more dominant company in five years is very possible with Shaw Communications.
