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In the "never mind what you've done for me lately, what are you going to do for me next?" world of the stock market, Rogers Communications Inc. and its gaudy 2010 financial numbers don't count for much with a skeptical Bay Street.

Despite ringing up revenue of $12.2-billion, free cash flow of $2.1-billion and a profit of $1.7-billion - all up solidly from 2009 - the Toronto-based telecommunications, cable and entertainment company's year-end results did little to impress analysts when they were released last week.

In fact, all the numbers did was deepen the analysts' growing unease about Rogers' future amid cutthroat competition and a dearth of areas for growth.

Rogers' own guidance for 2011, while not a big surprise to analysts, underlined the point that the headwinds are already blowing strongly. In the year-end statement, the company said its operating profit would be flat to 2 per cent higher, while free cash flow could actually decline by up to 6 per cent.

"Our guidance … is reflective of what we expect will be a continuation of the intensely competitive environment we saw in the second half of 2010," Nadir Mohamed, president and chief executive officer of Rogers, said in a conference call with analysts following the earnings release.

Indeed, analysts said the fourth-quarter numbers painted a picture of a company fighting an increasingly costly and unsuccessful battle to retain customers in its wireless business (cellphones and other mobile devices) against a growing number of low-cost upstart competitors eager to take a bite out of its market share, particularly in the huge Greater Toronto market where Rogers has the most exposure. They believe that, for the coming year, Rogers will be forced to spend more to try to hang on to subscribers - at the expense of its bottom line.

"The company will inevitably need to trade off some financial growth to retain its customers in the near term," said UBS Securities Canada analyst Phillip Huang.

Target Prices Cut

In the wake of the financial results, most of the analysts who follow Rogers reduced their 12-month price targets on the stock by anywhere from 3 to 7 per cent, pointing to rising pessimism over its wireless growth prospects.

However, none actually went so far as to downgrade their ratings. Five of the 12 analysts tracked by Zacks Investment Research rate Rogers a "strong buy" or "buy," versus seven "holds." It's a substantial reversal from a year ago, when eight of the analysts had the stock at a "strong buy" and three more rated it a "buy."

Analyst Neeraj Monga of Veritas Investment Research believes that Rogers' stock is entering a "grey zone" similar to the doldrums that have dogged another major player in Canada's wireless industry, smart phone maker Research In Motion Ltd., over the past 18 months.

"Despite free cash flow and earnings growth, investors honed in on rising competition surrounding RIM and balked at paying a premium multiple for the stock," he wrote in a recent report. "Similarly, we believe that the investment community is bound to look past Rogers' 2011 free cash flow generation and will start pricing in declining earnings before interest, taxes, depreciation and amortization and free cash flow beginning in 2012."

Free Cash Flow Issues

Much higher taxes will also eat into free cash flow from next year. Rogers has been able to keep its tax rates down in recent years by writing off depreciation on past capital spending to build up its network infrastructure, but that will be used up by the end of the 2011 tax year. Mr. Monga estimated that the resulting tax hit could reduce free cash flow by as much as 30 per cent.

The free cash flow is a pivotal issue with Rogers investors, as it's one of the big attractions of the stock. In the company's conference call last week, Mr. Mohamed more than once highlighted the company's capacity to "return significant cash to shareholders" - to the tune of $2.1-billion in share buybacks and dividends in 2010 alone.

In conjunction with the earnings release, Rogers raised its quarterly dividend by 11 per cent, to 35.5 cents a share from 32 cents. The stock's dividend yield is now more than 4 per cent - nearly two full percentage points above the yield for the benchmark S&P/TSX composite index as a whole, and more than a half a percentage point better than 10-year Canadian government bonds. It also marked the seventh straight year the company has increased its dividend - a key statistic for income-sensitive investors.

Prospects for Dividend

But Canaccord analyst Dvai Ghose noted that with free cash flow poised to be "flat to declining" this year and in outright decline in 2012, the dividend increase represents a significant increase in the payout ratio, from 40 per cent of free cash flow this year to nearly 50 per cent next year.

Analysts believe Rogers will still press ahead with annual increases to its dividend, although likely at a slower pace than in recent years (the payout has risen nearly 15-fold since 2005). But this may come at the expense of its sizable share-buyback policy.

Last week, Rogers renewed its $1.5-billion buyback program, authorizing the purchase of up to 10 per cent of the public float of its widely held class-B shares. Over the previous two years, Rogers bought back about 80 million of the shares, or roughly 15 per cent of the shares outstanding, at a cost of more than $2.6-billion.

Indeed, some analysts believe the massive buyback policy is a symptom of a key problem dogging Rogers: A lack of investment in new businesses from which it can grow.

"It is the only large-capitalization telecommunication company in Canada that is not entering a new business segment, while all of its rivals are expanding into the home entertainment or mobility business," Mr. Monga said. "The reason they are buying back so much stock is because they don't have anything else to do with the capital."

Mr. Monga suggested the company may be looking at acquisitions to get back on the growth path, and he believes the logical target is Cogeco Cable Inc. Rogers has been amassing shares in the Quebec-based cable operator for several years, and now holds almost one-third of its stock.

"I think it's the next step for them," he said.

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