Looking for Dividend Growth in the Canadian Communication Industry: Shaw Communications

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The Canadian Communications Industry is made up of only a few key players. Today I’ll be looking into Shaw Communications and seeing how its future expected dividend growth compares to some of its competitors, namely Telus, Rogers Communications and BCE.

Dividends

A quick look at the Canadian Dividend All-Star List tells me that Shaw Communications has increased their dividend for 10 consecutive calendar years in a row. For a Canadian company this is an impressive streak. Telus has a streak of 9 years, Rogers Communications has a streak of 8 years, and BCE has a streak of 4 years. All of these companies have increased their dividend within the last year so when the year is over I expect them to move up one year on the list. For Shaw Communications this would make 11 consecutive years of increasing dividends.

Shaw Dividends Chart

Dividends have been steadily increasing over the years which are good signs, but it looks like the significant dividend growth occurred from 2003 to 2008, with the past 4 or 5 years showing a slowdown in dividend growth.

Dividend Growth

The most recent monthly dividend increase happened with the dividend recorded in March 2013. The monthly dividend increased by 5.2% from $0.0808 CAD to $0.0850 CAD. The latest increase is what I’d expect as you can see that more recent dividend growth rates are around 5%.

Shaw Dividend Growth RatesThe 5 and especially the 10 year growth rates are high, and both above the 8% rates I like to see. The dividend growth rates have slowed in the past few years, and I’d like to see them get back over 8% if they can be paid out in a sustainable manner. I’ve said before that past dividend growth rates can be used to predict future rates, but the 10 year rate is very high and a similar rate going forward would not be sustainable. When EPS growth is compared to dividend growth you can see that dividends have been growing at much faster rate than EPS.

Shaw EPS vs Dividend Growth

I’ve shown the 12 year growth rate instead of the 10 year rate because of the negative EPS in fiscal 2001 to 2003. As you can see dividend growth has been about double that of EPS, which is not a sustainable trend.

Dividend Sustainability & Expected Future Dividend Growth

To get a better idea of the dividend growth going forward the past payout ratio and estimated future earnings should be examined.

  • Payout Ratio

Shaw Communications payout ratio at the end of the most recent fiscal year was 58.7%. For most companies a payout ratio of 60% or less is good, but some industries like the cable/telecom industry typically have higher payout ratios (60-80%). This suggests that Shaw still has some room to grow its dividend.

Shaw Payout Ratios

If we look at the chart we can see that the payout ratio for the past 5 years is usually around 60% to 70%, with the exception of 2008 when it spiked up. I expect Shaw Communications to try and maintain a similar level (60-70%) going forward.

  • Estimated Future Earnings

Analysts are currently estimating that Shaw Communications will grow its EPS at 5.97% annually for the next 5 years. It is best to take these estimates with a grain of salt as a lot can happen in 5 years, and the further away the estimate the less accurate it gets. That said analyst estimates can still be useful when trying to guess future dividend growth rates (The key word being guess).

Shaw Future Dividend Growth Rates

Based on Shaw  Communications previous payout ratios and the estimated future earnings I’d expect Shaw  Communications to continue to raise its dividend annually at a rate around 6.4% to 9.8%. Based on the past few years of dividend growth at around 5% I’d expect the dividend growth to be at the lower end of the 6.4% to 9.8%.

Competitors Expected Future Dividend Growth

With Shaw Communications monthly dividend of $0.0850 CAD and its current price around $23, it is yielding around 4.4%.

Telus has already stated in the past that it would increase its dividend by 10% for 3 years with the last 10% annual increase coming in 2013. This takes a lot of the guess work out for this year, but what about after that. In their 2012 Annual Report they stated that they would be targeting a payout ratio of 65% to 75%, which is a 10% bump up from their previous targets. Using these payout ratios and the analysts 5 year annual EPS growth estimate of 8%, I’d guess that annual dividend growth for the next 5 years will be around 9.7% to 12.8%. This suggests a better growth rate than Shaw Communications, but Telus currently has a lower dividend yield of around 3.5%.

BCE is the opposite of Telus as it offers a higher yield currently around 5.1%, but low dividend growth prospects. BCE’s payout ratio from its most recent fiscal year end was 65.5%, which does not allow for much dividend growth beyond its EPS growth rate. Analysts expect EPS to grow 1.5% annually for the next 5 years, which suggests limited future dividend growth. Even if BCE increased their payout ratio to 75% this would still only result in an average dividend growth rate of 4% annually for the next 5 years.

Rogers Communications pays out a quarterly dividend of $.0435 CAD which translates into roughly a 3.5% yield at current prices. This is lower than Shaw’s current yield and around the same as Telus. Rogers Communications payout ratio was just under 50% at its most recent fiscal year end, which is roughly where it’s been for the past 4 fiscal years. Its 5 year average comes in just a little over 50%, so it looks like Roger’s has been targeting roughly a 50% payout ratio. Analysts expect EPS to grow 4.4% annually for the next 5 years, which suggests annual dividend growth of 5.1% if they keep their payout ratio at 50%. While this is a lower expected dividend growth rate than Telus and Shaw Communications, Rogers Communications still has a much lower payout ratio. A lower payout ratio means more potential for dividend growth. If the payout ratio was increased to 60% this results in a 5 year annual dividend growth rate of 9.0%.

Conclusion

Overall Shaw Communications shows some good numbers when looking at the past 10 years, but more recently the company has seen a loss of customers to their main competitor Telus and their 5 year history isn’t as compelling. Their dividend growth has been great, but I expect future dividend growth to be in the range of 6.4% to 9.8%, likely on the lower end of this range. While these are respectable dividend growth rates, I’d expect better rates from Telus and potentially Rogers Communications if they increase their payout ratio.

For the complete analysis of Shaw Communications and my target buy price check out this article.

Disclaimer

I own Telus. I also have a few BCE shares left over in a dividend reinvestment plan (DRIP) from when I used to help others enrol in DRIPs. You can see what’s in my portfolio on my dividend portfolio page.

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