Shaw Communication’s (NYSE: SJR) stock price fell as much as 4% after the company reported its financial results for the second quarter of its 2019 financial year.
While earnings were broadly in line with expectations, revenue fell marginally from the same period a year earlier. The company also said that growth in the second half may be tempered as the company continues to invest heavily in infrastructure.
Revenue for the quarter was C$1.32 billion, down from C$1.33 billion a year earlier. Shaw’s revenue was well below the C$1.37 billion analysts expected, but the company did swing back to a profit which was in line with expectations.
Net income for the second quarter was C$155 million and translated into EPS of C$0.30, which were in line with analyst consensus. This compares to a C$175 million net loss, or C$0.35 a share, for the same period a year earlier.
Wireless Revenue Lower After Strong 2018 Growth
Revenue from the wireline business that includes cable, satellite TV, internet, and phone services was steady at C$1.07 billion. However, the wireless business’ revenue fell to C$247 billion from C$264 billion. The wireless segment was coming off a high base from the previous year, due to the introduction of the iPhone in 2018. While wireless equipment sales fell 40%, wireless services grew 26% during the quarter.
During the quarter it also managed to add 65,000 new post-paid subscribers to its wireless service. Shaw is Canada’s fourth-largest wireless operator and competes head-on with the “big three”, Telus Corp., Rogers Communications Inc., and Bell Canada. Shaw seems to have won business away from the big three in some geographies by offering attractive data packages. Wireless ARPU increased by 7.5% as customers switched to Shaw’s larger data plans.
Continued Capital Investment to Impact Growth
Shaw has been expanding its network in Western Canada and developed 5G services. In total, the company plans to invest C$1.2 billion during the full year and also expects to spend C$15 million on campaign marketing during the second half. As a result, the company’s management said it expects growth in the second half to be tempered by large investments in its network infrastructure.
The company believes it is also on track to generate C$500 million in free cash flow during the 2019 fiscal year. This is good news for income investors as it implies the company’s 4.5% dividend yield is safe.
Does the Dividend Yield Justify the Stock Price?
Before the results were released, Shaw’s stock price was already struggling against technical resistance at $21. This level has acted as resistance for the last year, and it appears a stronger set of results will be required for it to be broken.
The company has invested heavily in its wireless business, which should contribute to growth in the future. However, wireless still accounts for around 20% of total revenue and will need to grow considerably before it is the main driver.
The dividend yield of 4.7% is very attractive for a business that can also deliver capital growth. Although the forward PE of 13.7 is not unreasonable, it may be fully priced when you look at realistic growth prospects in the next few years.
Furthermore, profits for Shaw may continue to be lumpy, which will cause stock price volatility. Investors will need to be aware of this and look for opportunities created by the volatility. While Shaw is a solid dividend-paying company, investors might do better to wait for bad news before investing. Alternatively, the stock may offer several trading opportunities in the next few years.
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