One Good Idea: Buy Rogers Communications bonds

A strong balance sheet and fat margins back these investment-grade bonds with a generous yield

By Dianne Maley
Globe Investor Magazine online, January 19, 2009

The Source: Scott Marchakitus, analyst at Goldman Sachs in New York.

The Idea: Buy Rogers Communications Inc. bonds.

A few years ago, Rogers Communications was an upstart, growing at a break-neck pace by piling on debt to buy assets. Today, it is "a steady ship in rough seas," Mr. Marchakitus says.

Debt as a multiple of operating profit has fallen from a nail-biting 5.3 times in 2004 to 2.1 times, and Rogers' bonds have joined those of world giants AT&T, Deutsche Telekom AG and Spain's Telefonica SA in being rated "outperform" by Goldman Sachs.

In 2007, Standard & Poor's Corp. and Moody's Investors Service raised the company's debt to investment grade with a positive outlook.

"It's been solidly investment grade for two years," Mr. Marchakitus said in an interview.

Rogers has a strong balance sheet, good operating results and "the best margins in Canada," he said. Helping to tip the balance in Rogers' favour were management's cautious stance on future dividend increases, the defensive nature of the telecommunications industry, growth potential for wireless telephony and the fact the bonds were badly beaten down last October, Mr. Marchakitus said.

At one point in late October, the 6.8 per cent bonds due Aug. 15, 2018, had slumped to the $83.50 (U.S.) range, giving them a yield of 9.5 per cent, he notes. They have since bounced back to the $103-$104 range, for a yield of 6 to 6-l/2 per cent. That compares with 2.3 per cent for 10-year U.S. Treasuries and 2.6 per cent for 10-year Government of Canada bonds.

Rogers' debt is about 2.1 times earnings before interest, taxes, depreciation and amortization, a measure of the company's ability to make its payments. The company has $300-million (Canadian) of debt coming due this year, none in 2010 and a manageable amount in 2011, he added. It has a $1.8-billion (U.S.) credit line.

The Payoff: A higher yield than is available on government bonds, term deposits or guaranteed investment certificates, plus a possible capital gain if yield spreads narrow on corporate bonds relative to U.S. Treasuries (that is, if interest rates fall and bond prices rise).

The Big Risk: As with all bonds, prices could fall and investors who sold before the bonds matured would suffer a capital loss. As well, yields could be eroded by inflation over time. But the big risk to Rogers bondholders is that the company could be tempted by yet another acquisition, adding to its debt load, as it has in the past, or that it might use borrowed money to buy back shares or raise its dividend, which Mr. Marchakitus thinks unlikely in the current environment.

Why listen to Scott Marchakitus? Mr. Marchakitus placed second among telecom analysts ranked by New York's Institutional Investor magazine. Goldman Sachs is a seasoned and respected bond dealer and one of the few investment houses to survive the Wall Street debt disaster.

- Special to The Globe and Mail