Cogeco Communication's new CEO Frederic Perron, pictured in the company's Montreal office on July 15, is layoug out a profit-growth path that eschews deals and focuses on getting more dollars from existing customers and cutting costs through best practices.Andrej Ivanov/The Globe and Mail
Cogeco Communications Inc. CCA-T chief executive officer Frédéric Perron has a problem not entirely of his own making.
The Quebec cable company’s current mid-$50s share price is low, embarrassingly so. It’s less than half the value of a 2020 takeover offer for the company that Cogeco rejected. It’s a reflection of investors’ verdict that the company’s growth-via-acquisition plan of years past has been a failure.
Mr. Perron, in investor calls and an interview with The Globe and Mail’s Alexandra Posadzki this week, is charting a profit-growth path that eschews deals and focuses on getting more dollars from existing customers and cutting costs through best practices.
But there may be another way to boost Cogeco’s share price, one analyst argues: Take the cash that might be spent on acquisitions and instead send billions of dollars back to shareholders via dividends and buybacks. In short, he says, be a “cannibal of capital” – survive and thrive by eating your own.
The analyst is Desmond Lau of Veritas Investment Research, who has been critical of Cogeco’s acquisition strategy. In January, 2023, he compared it to playing board game Snakes and Ladders.
“There’s always a fear of landing on a snake just to lose all your progress and then some. Cogeco … has fallen back on progress many times due to misallocated capital. And unlike rolling snakes, these were not by chance, they were unforced errors.”
Mr. Lau criticizes its Cabovisão acquisition in 2006, Peer 1 deal in 2012 and its 2021 purchase of cable systems in Ohio – transactions that represented 60 per cent, 36 per cent and 26 per cent of Cogeco’s market capitalization at the time they were made.
In a June report, Mr. Lau estimated Cogeco acquisitions “have destroyed $2-billion in shareholder value.” The company’s spokesperson Youann Blouin declined to comment on Mr. Lau’s report.
Numbers like these explain why Mr. Perron’s comments this week look inward. But Mr. Lau has an alternate long-term plan for the company.
He estimates Cogeco could, over the next decade, buy back 56 per cent of its shares outstanding while maintaining a dividend payout ratio of 40 per cent.
That, he calculates, could boost the company’s free cash flow per share by 13.5 per cent annually and total shareholder return, including dividends, by 23 per cent annually. (While there’s no standard definition of free cash flow, it’s generally considered to be a company’s cash from operations, minus its annual capital spending.)
If Cogeco sells some assets – which Mr. Perron told The Globe this week is a possibility – the numbers get even better, Mr. Lau thinks.
There’s an extreme best-case model for this plan, and the company behind it may surprise you: Dillard’s Inc., a deep-South U.S. department store chain.
Dillard’s annual revenue is now 21 per cent below 2000 levels, and its top line has been flat for a decade, Mr. Lau says. However, after the company repurchased 63 per cent of its shares, free cash flow per share has gone from $2.04 in 2000 to $40.28 today – a twentyfold increase. The company’s shares are 27 times their 2000 levels.
“Dillard’s provides a blueprint of how management teams can still create shareholder value in a declining industry,” he writes.
But it’s not the only example he cites, and some of the names are far from basket cases: AutoZone Inc., O’Reilly Automotive Inc., Domino’s Pizza Inc. and Apple Inc. repurchased, respectively, 48 per cent, 45 per cent, 37 per cent and 38 per cent of their shares over the past decade. And their shares posted average annual returns between 18 per cent and 24 per cent.
There’s a big caveat, of course: Companies need to buy back shares when they are truly undervalued, not when management incorrectly thinks they are. Or, at least, in line with recent historical valuations.
Cogeco cable peer Charter Communications has repurchased 43 per cent of its shares over the past decade, Mr. Lau says, but some of the buying came when the stock was trading at a price-to-earnings multiple of 37, versus the current P/E of eight. And it made matters worse by issuing debt to fund the buybacks, rather than relying solely on its own cash flow.
The good news about Cogeco’s woes is that the shares are cheap enough – a P/E of six – to avoid the Charter problem. Mr. Lau’s belief that Cogeco could buy back 56 per cent of shares places it above most of the companies in his report in terms of repurchase activity, and closer to the Dillard’s model. He notes Cogeco and Dillard’s are both family-controlled companies that “have the luxury of thinking both long-term and in terms of return on invested capital, instead of purely growth.”
And, he says, “with a new CEO, and ownership that is more focused on shareholder value, this is a chance for Cogeco to take advantage of a large buyback opportunity.”
That doesn’t seem to be Mr. Perron’s plan right now, based on his public comments that highlight synergies and data science, cross-selling and U.S. expansion via government subsidy. The blueprint is there for Cogeco to follow, however, Mr. Perron may find sooner rather than later it’s the only path that Cogeco should follow.
Editor’s note: An earlier version of this article incorrectly indicated that analyst Desmond Lau argues that Cogeco should stop investing in itself. This version has been corrected.