The shares of Shaw Communications Inc. have enjoyed a premium price over other cable stocks for a long time, thanks in part to shrewd leadership and steady dividend growth.
But at the moment, three-quarters of financial analysts who follow the Calgary-based cable company are withholding support for the stock, waiting for greater clarity on how management plans to navigate a changing landscape.
The major issues are greater competition from Telus Corp., which is ramping up its own television service, and Shaw's plans for building a wireless network to compete with the phone companies.
On Friday, Shaw is scheduled to release second-quarter results, with the consensus on the Street expecting profit of $143.9-million on sales of $925.2-million. The forecast amounts to annual growth of 10 per cent and an 8 per cent decrease in profit on the back of a bigger tax bill.
Analysts and investors will be particularly interested to see how Shaw's cable business has been effected by new competition and to hear management's comments on any wireless plans.
We are befuddled when it comes to Shaw's wireless strategy. Dvai Ghose, analyst with Genuity Capital Markets
Shaw paid $189.5-million to Ottawa in 2008 for wireless spectrum in B.C., Alberta, Saskatchewan, Manitoba and Northern Ontario, covering an area populated by 9.4 million people. The company boasted that it paid significantly less than what rivals paid. Telus, in comparison, paid $879.9-million for spectrum that covers about 30 million people.
But 18 months ago, as the recession raged, the company put its plans for a wireless network on hold, saying the return on investment wasn't strong enough. At the same time, Quebecor Inc.'s Vidéotron Télécom Ltée, which paid $554.5-million for licences covering eastern Ontario and Quebec, charged ahead.
Jim Shaw, the chief executive officer and vice-chairman, told analysts a year ago that he would not invest any more money in the short term to turn the company into a cellphone carrier. Instead, he said the plan would be to continue to upgrade Internet and cable services, the engine of the company's growth.
"We have not seen a compelling reason to get in there," he said at the time. "There are a lot of problems in wireless. There's a lot of price competition. So we are just kind of on the edge to watch."
Some stakeholders might be getting antsy waiting for a more definitive wireless plan. Shaw raised $650-million of debt at the end of 2009 to finance a wireless operation.
"We are befuddled when it comes to Shaw's wireless strategy," Dvai Ghose, an analyst with Genuity Capital Markets, wrote in a report yesterday, referencing the dramatically different approach taken by Vidéotron.
Vince Valentini of TD Securities Inc. noted recently that Shaw will probably announce more detailed plans for a wireless network in Western Canada on Friday, and that leaves him and other analysts unsettled. They worry that to finance such an expensive capital project, Shaw will be forced to freeze, or even cut, its dividend. The stock currently yields 4.4 per cent. But they also know that for both offensive and defensive reasons Shaw needs to offer wireless services.
Shaw currently pays out about 85 per cent of its free cash flow in dividends, and if the company allocates some of that cash flow to a major wireless investment, the payout could fall under pressure, Mr. Ghose says.
"If Shaw decides to pursue a facilities-based wireless build, we believe that we could see a slowdown or a suspension of dividend growth," he wrote.
One of the rumours that has circulated is that Shaw will partner with Rogers Communications Inc. on the network to reduce costs. Whatever the plan is, the cost would likely prevent dividend growth for several years, which is "the critical piece of information that investors are waiting for," says Jonathan Allen, an analyst with RBC Dominion Securities Inc.
The consensus on the Street for Shaw's second-quarter profit
The amount of debt Shaw raised at the end of 2009 to finance a wireless operation
The percentage dividend yield of Shaw shares
The percentage of Shaw's free cash flow that it currently pays out in dividends