Financial Ratios and Strategy in the Canadian Telecommunications Sector

FINANCIAL RATIOS AND STRATEGY IN THE CANADIAN TELECOMMUNICATIONS SECTOR

Merridee Bujaki Carleton University Sylvain Durocher University of Ottawa OTTAWA, ONTARIO, CANADA

Abstract

This case presents a three part scenario that walks students through calculating and interpreting a number of financial statement ratios for three firms in the Canadian telecommunications sector. As telecommunications are now an important aspect of most people’s day-to-day activities, the context of this case is meaningful to most students, hence enhancing their intrinsic motivation to explore the links between financial ratios and strategy. The case scenario invites students to play the role of a financial advisor who is researching possible investments in a telecommunication company’s stock for two individual clients. Part 1 of the case presents abbreviated financial statement information and asks students individually to calculate performance and leverage ratios. Working in small groups, students are then asked to interpret their findings. Part 2 of the case introduces the DuPont Model and asks students to rearrange the ratios they have calculated to apply the DuPont Model and to determine what additional insights this model offers. Part 3 of the case provides the students with additional information on the ownership structure, dividend payout ratio, credit ratings, and corporate governance scores for the three companies and encourages them to think critically about why each company might have chosen the operating and financing strategies they did. Finally, students are invited to select one company to invest in from the perspective of each individual involved in the scenario and to indicate which company they would personally prefer.

KEYWORDS : DuPont Model, financial ratios, strategy, telecommunications

PART 1

As a financial advisor in Ottawa, Ontario you, Chris MacFarlane, have many clients who lost a considerable amount of money when Nortel Networks Corporation experienced significant losses beginning in 2001 and then filed for bankruptcy protection in 2009. Nortel had been a major Canadian telecommunications company and for a time was Canada’s largest company based on market capitalization. Nortel had a significant presence in Ottawa, including having its research headquarters there. In fact, Nortel had been Ottawa’s largest private sector employer before tens of thousands of Nortel employees were let go in successive waves of layoffs. Not surprisingly, many of your clients expressed some concern when you suggested they include shares of the Canadian telecommunications sector in their portfolios. In spite of Nortel’s demise, the Canadian telecommunications sector (officially the Information and Communications Technologies Sector) is a significant, and generally growing, sector of Canada’s economy. As a whole the sector generated $155 billion (Canadian) in revenues in 2011, is the largest 90 International Journal of Case Method Research & Application (2014) XXVI, 2 private sector spender on research and development, and is a major source of jobs (3.0% of total jobs in Canada), particularly knowledge-intensive and well-paying jobs.1 According to Industry Canada, the sector is comprised of manufacturing, wholesaling, software and computer services, and communications services sub-sectors. Included in the communications sub-sector are telecommunications service companies. You do not want your clients to overlook the telecommunications service companies in their investment portfolios, as it is a dynamic and growing sector. From 2007 to 2011 the communications sub- sector experienced growth in revenues of 19.6%. While employment in the other three sub-sectors declined in 2011, employment in the communications sub-sector increased by 1.2% over the prior year. Research and development spending in the communications sub-sector grew 11.2% from 2007 to 2011 (while it has fallen in some of the other sub-sectors). The sub-sector has a well-educated workforce with 32.3% of employees having a university degree and averaging over $60,000 annually in earnings. While the communications sub-sector is largely focused on the domestic market in Canada (over 80% of revenues are generated in Canada), the export market for services is growing (up 7.6% from 2007- 2011). 2 You have suggested to two of your clients that they invest in the Canadian telecommunications sector to take advantage of the growth this sector has recently demonstrated. Dan Currie, a retired teacher, is 62, and needs a steady stream of cash flows to supplement his pension for the future. Having previously lost some money investing in Nortel shares, Dan places a high priority on investing in companies that have corporate management teams who are prudent in their decision making and exercise due care. Anu Goell is a 30 year old professional consultant who is ready to incur more risk for greater return. She loves to speculate and is results-oriented, both in her career and her investing. Dan is more risk averse than Anu. You have just returned from attending a one-day conference entitled, ‘‘The future of the Canadian telecommunications industry,’’ organized by the Ottawa Chamber of Commerce. Based on what you heard, you are confident the telecommunications sector is one that both Dan and Anu should consider. Although many of the companies in the information and communications technologies sector are small 3, there are three large publicly traded Canadian telecommunications companies that are leaders in the sector that you would like your clients to consider: Rogers Communications Inc. (Rogers), BCE Inc. (BCE) and TELUS Corporation (Telus). You need to find a way to organize what you have learned at the conference to be able to present it effectively to Dan and Anu when you have your next individual meetings with them. Many companies involved in the telecommunications sector were present at the conference, including representatives from Rogers, BCE and Telus. Printed copies of the companies’ 2010 annual reports were available at their respective exhibitor’s booths. Based on these reports you draw the following table that summarizes key financial figures for each company (see Table 1).

TABLE 1 Selected financial information – Fiscal 2010 Rogers (millions) BCE (millions) Telus (millions) Sales $12,186 $ 18,069 $ 9,779 Net Income 1,528 2,277 1,034 Assets 17,330 39,276 19,599 Debt 13,371 22,069 11,398 Equity 3,959 17,207 8,201

You know that Dan and Anu will want you to help them interpret what these numbers mean. You also anticipate Dan will ask you about how each company is managed and Anu will want to know more about the companies’ borrowings and dividends. You resolve to find more information about each company in preparing for individual meetings with each of these clients. In addition you want to present the information to Dan and Anu in a clear, understandable and meaningful way. As a first step you expect converting the numbers to ratios will be informative. Dan and Anu are already familiar with basic financial statement ratio calculation and interpretation. You believe exploring how the basic financial statement ratios are related to each other will help your clients understand the investment opportunity each company presents. The DuPont model offers an effective way to explore how operating, investing and financing decisions combine to influence the return to shareholders. International Journal of Case Method Research & Application (2014) XXVI, 2 91

The formula for the DuPont model is attributed to Donaldson Brown. Working in the 1920s and 1930s, first at E.J. DuPont de Nemours and Company and then at General Motors, Donaldson Brown determined that the Return on Equity ratio (Net income ÷ Equity) could be disaggregated into its component parts to show how decisions made by various managers within a corporation combine to explain overall corporate performance (Chandler, 1977). The DuPont model formula developed by Donaldson Brown is still in widespread use today and is included in most post-secondary and professional financial statement analysis textbooks and courses taught in North America (see for example, Easton, et al., 2013; Fridson and Alvarez, 2011; Palepu and Healy, 2013; Pratt and Hirst, 2009; Robinson, et al., 2012).

TECHNICAL REQUIREMENT

As Chris MacFarlane, calculate the Profit Margin, Asset Turnover, Return on Assets, Leverage, Debt/Equity and Return on Equity ratios for each of the three telecommunications companies from the information in Table 1. Complete the chart provided below that already includes ratios for the telecommunications industry in the last column.

FINANCIAL RATIO SUMMARY Ratio Rogers BCE Telus Industry 1

Profit Margin 0.2784 (Net Income/Sales) This ratio is used to assess profitability. It indicates profit per dollar of sales after all expenses have been deducted and reflects operational efficiency.

Asset Turnover 0.4700 (Sales/Assets) This ratio is used to assess the efficiency with which assets are used to generate sales. It indicates sales generated per dollar of assets and reflects the success of investment decisions.

Return on Assets 0.0757 (Net Income/Assets) This ratio is used to assess profit generated for each dollar invested in assets. It reflects the combined effectiveness of operational and investment decisions.

Leverage 1.7900 (Assets/Equity) This ratio is used to assess a company’s leverage. It indicates how many dollars of assets have been acquired for each dollar provided by the shareholders. It reflects financing and investment choices by the company.

Debt/Equity 0.8600 This ratio is used to evaluate the proportion of debt in the company’s capital structure, relative to the contributions by owners of the company. It indicates how many dollars of debt have been incurred for each dollar of equity provided by the shareholders and reflects financing choices made by the company.

Return on Equity 0.1456 92 International Journal of Case Method Research & Application (2014) XXVI, 2

(Net Income/Equity) This ratio is used to assess the rate of return generated for each dollar provided by the company owners. It shows dollars of profit earned during the year for each dollar provided by the shareholders. It reflects the combined effects of operational, investment, and financing decisions. 1. The industry ratios are from Infomart database, FP Industry Reports, for the Telecommunication Services industry (Date consulted: 14 December 2011).

ANALYTICAL REQUIREMENT

Working in small groups, address the following two questions: (1) What insights can you draw from your calculations for each of Rogers, BCE and Telus? (2) What additional insights can you draw from the Industry ratios?

PART 2 The DuPont Model breaks Return on Equity down into its component parts, as follows: ROE = Profit Margin Ratio x Asset Turnover Ratio x Leverage ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) ROE = ROA x (Assets/Equity)

TECHNICAL REQUIREMENT

In preparation for meeting with your clients, Dan and Anu, show the components of the DuPont Model for each of Rogers, BCE and Telus by completing the following chart.

Profit Margin X Asset Turnover X Leverage = ROE

NI/Sales x Sales/Assets X Assets/Equity = ROE

Rogers

BCE

Telus

ANALYTICAL REQUIREMENT

What observations can be made about the three companies based upon the DuPont model?

PART 3

You are scheduled to meet with Dan tomorrow and Anu later in the week to review their portfolios and discuss new investment opportunities. In preparation for these meetings, you have collected additional information about each company. Dan and Anu understand that companies make different operating and financing decisions for a number of reasons. You believe the additional information you have collated in the following table provides a selection of additional information about each of the three telecommunications companies that will help you address any questions your clients may have and help you to recommend an appropriate investment for each client. International Journal of Case Method Research & Application (2014) XXVI, 2 93

Rogers BCE Telus Ownership 1 Family controlled Widely held Widely held (90.9%) Dividend payout ratio 2 48% 62% 62% Credit rating – S&P 2,3 BBB BBB+ BBB+ Credit rating – Moody’s 2,3 Baa2 Baa2 Baa1 ROB* Corporate 104 th 38 th 68 th Governance Rank 4 ROB* Corporate 59/100 77/100 69/100 Governance Score 4 1. Data taken from 2010 Corporate Annual Report for each company, available at SEDAR.com. 2. Data taken from 2010 Management Information Circular for each company, available at SEDAR.com. 3. Credit rating agencies use different ratings categories. For S&P (Standard & Poors), BBB is a lower rating than BBB+; Moody’s ratings for these companies show improvement from Baa2 to Baa1. 4. Corporate governance rank and score taken from The Globe and Mail’s Report on Business “Board Games 2010: Rankings for Corporations”, available at http://www.theglobeandmail.com/report-on- business/careers/management/board-games-2010/board-games-2010-rankings-for- corporations/article4083340/ (Date retrieved: 14 December 2011). *Globe and Mail’s Report on Business

REQUIRED

Working in small groups, play the role of Chris MacFarlane and discuss how you can use this information when meeting with Dan and Anu to help them understand the differences in the companies’ operating and financing strategies. Which company would probably be preferred as an investment by Dan? Which by Anu? Which company would you personally prefer as an investment?

CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE

This case was set up to contextualize financial ratio analysis and to integrate strategy considerations into ratio interpretations.

CASE LEARNING OBJECTIVES

This pedagogical activity is designed to provide students with an opportunity to apply their financial ratio analysis knowledge to a scenario that is meaningful to them and to encourage them to link this knowledge with strategy. With the increased prevalence of cell phones and advanced communications technology, the telecommunications industry is a context with which most students are familiar, at least at a basic level. In these ways, this case is meaningful to students, and it might enhance students’ intrinsic motivation and commitment to learning. This case involves both the “Application” and “Analysis” levels in terms of Bloom’s (1956) taxonomy of learning objectives. The third level, “Application”, goes beyond the first and second levels (Knowledge and Comprehension) as it requires applying acquired knowledge to new situations. This case is designed to be used with students that already know and understand the basics of financial ratios, that is to say their definitions and how each of them is computed. This case invites them to apply their knowledge in a different context as they are asked to compute selected ratios for real companies in the Canadian telecommunications industry. They also have to recall their previous knowledge of the DuPont Model and apply it to these same companies. The fourth level in Bloom’s (1956) taxonomy, “Analysis”, goes further than the first three levels by requiring students to break the information into its components in order to identify reasons and explanations. This case invites students to identify and discuss the insights (i.e. possible explanations) derived from the computation of each of the companies’ ratios, including the DuPont Model, and from the 94 International Journal of Case Method Research & Application (2014) XXVI, 2 comparison with the industry as a whole. The “Analysis” level is also involved as the case invites students to reflect on other possible explanations for the comparative performance of the three companies related to credit ratings, governance and ownership structure. Students are asked to play the role of a financial advisor in this case. Although financial advisors usually make their recommendations relying on a broader range of information than that provided in the case scenario, the details available to students nonetheless present a realistic setting in which financial advising takes place.

IMPLEMENTATION GUIDANCE

This case is primarily targeted at graduate students or executives who possess a basic knowledge of financial statements and ratio analysis. As such, it is most useful in MBA or executive MBA accounting classes or in executive training sessions. However, senior undergraduate students in a financial statement analysis course would also find the case linkages valuable. This case works well in a 60 minute class period. Part 1 can be distributed and students asked to calculate the ratios on their own (or if time is limited, the ratio results can be given to students). Working in small groups, students are then asked to identify insights from the comparison of ratios across the three companies and compared to the industry ratios. Part 1 of the case should take approximately 15 minutes to complete. Part 2 of the case can then be distributed (alternatively Parts 1 and 2 can be distributed together). Part 2 has the students reorganize the ratios and apply the DuPont model, allowing them to realize that the model does lead to the same ROEs calculated under Part 1 (approximately 5 minutes). Students can be given a few minutes to think about and discuss with their neighbours how the DuPont model results can be understood (5 minutes). Parts 1 and 2 can then be taken up together. One suggestion is to reproduce the chart of ratios on the board. Classroom discussion should then focus on how the performance of the three companies differs or is similar, and who is out (under) performing the industry. One point that should be raised is that BCE and Telus have similar ROAs. This allows the discussion to switch to the DuPont model presentation of information, as the DuPont model makes very clear that the two companies achieved the same ROA with different operational strategies. It can then be seen that leverage multiplies each company’s ROA to determine ROE. Another point that should be raised is the fact that Rogers not only outperforms their competitors in terms of ROA, but that their higher leverage also multiplies the impact to generate a much higher ROE. It should be pointed out that the leverage decision reflects differences in corporate financing strategies. Classroom discussion of Parts 1 and 2 should take approximately 20 minutes. The additional information in Part 3 can then be distributed and students given 5 minutes to consider how this information helps to explain the different strategic choices (both operational and financing) made by the three companies. A 10 minute class take up of Part 3 will complete the case discussion. Part 3 allows for a discussion of both the reasons underlying particular choices (for example, Rogers’ ownership structure helps to make sense of their greater use of leverage) and the consequences of these choices (for example, lower credit scores). Part 1 might alternatively require students to perform preparatory work by inviting them to gather the necessary information from the actual financial statements. It might be a way to have them use databases like SEDAR (The System for Electronic Document Analysis and Retrieval for the filing and distribution of securities information in Canada, available at www.SEDAR.com ). They could also be asked to search other databases, such as the Financial Post database (Infomart), to find the corresponding industry ratios. If this path is adopted, consider an additional 30 to 45 minutes of class discussions to reconcile the financial information obtained by the different groups from the financial statements and the relevant industry ratios extracted from the Financial Post database.

CLASSROOM TESTING

This case has been used about fifteen times by the authors from 2010 to 2013. It was developed for the specific needs of an executive MBA accounting course offered in a Canadian university and for the specific requirements of executive training sessions. More recently, the case was used in several MBA classes as well. Each time, the use followed the implementation guidance stated above (without requiring International Journal of Case Method Research & Application (2014) XXVI, 2 95 students to gather information from databases). The average time required to complete the activity was 60 minutes. Every time the case was used, it was well-received by the students. Participants enjoyed the fact that the case was simple but realistic. Informal verbal feedback obtained from participants revealed that they found the case useful in enabling them to make inferences about how different strategies underlie reported financial information. Participants also pointed out the usefulness of the DuPont Model – which initially seemed quite theoretical – in providing a tool to compare companies on aspects that affect their ROE. They also liked the link the case makes with corporate governance and risk ratings. One instance of the use of this case highlighted the importance of participants having sufficient basic knowledge of financial ratios. During one particular executive education session, some participants who were not sufficiently familiar with these basics struggled to complete the technical and analytical requirements within the time allotted. Additionally, many students had difficulty understanding why Leverage = Debt/Equity ratio + 1. A review of the balance sheet equation helped to explain this relationship.

TEACHING NOTES

Part 1 - Computation of financial ratios for each company While this case is intended to be used by students already familiar with basic financial statement ratios, it might be appropriate in the introduction to perform a brief review of how each ratio is computed and why each ratio is used. The technical requirement in Part 1 of the case includes basic formula for the various ratios discussed in the case, together with a brief indication of the use for each ratio. The following table presents and compares the selected financial ratios for the three companies.

Financial ratio s ummary Ratio Rogers BCE Telus Industry Profit Margin (Net Income/Sales) 0.1254 0.1260 0.1057 0.2784 This ratio is used to assess profitability. It indicates profit per dollar of sales after all expenses have been deducted and reflects operational efficiency. Asset Turnover (Sales/Assets) 0.7032 0.4601 0.4990 0.4700 This ratio is used to assess the efficiency with which assets are used to generate sales. It indicates sales generated per dollar of assets and reflects the success of investment decisions. Return on Assets (Net Income/Assets) 0.0882 0.0580 0.0528 0.0757 This ratio is used to assess profit generated for each dollar invested in assets. It reflects the combined effectiveness of operational and investment decisions. Leverage (Assets/Equity) 4.3770 2.2830 2.3900 1.7900 This ratio is used to assess a company’s leverage. It indicates how many dollars of assets have been acquired for each dollar provided by the shareholders. It reflects financing and investment choices by the company. Debt/Equity This ratio is used to evaluate the proportion of 3.3770 1.2830 1.3900 0.8600 96 International Journal of Case Method Research & Application (2014) XXVI, 2 debt in the company’s capital structure, relative to the contributions by owners of the company. It indicates how many dollars of debt have been incurred for each dollar of equity provided by the shareholders and reflects financing choices made by the company. Return on Equity (Net Income/Equity) 0.3860 0.1323 0.1261 0.1456 This ratio is used to assess the rate of return generated for each dollar provided by the company owners. It shows dollars of profit earned during the year for each dollar provided by the shareholders. It reflects the combined effects of operational, investment, and financing decisions.

There are several insights that can be drawn from the computation of these few ratios: • BCE has the best cost control and Telus has the worst, as shown by their respective profit margins. Cost control is crucial as these companies might not have a great deal of opportunity to increase revenues, given the competitive nature of wireless activities. • Based on their asset turnover ratio, Rogers is the most efficient at generating sales. BCE generates the lowest sales per dollar of assets. • Based on either the leverage or debt/equity ratios, Rogers is the most highly leveraged company. BCE is the least leveraged. • Rogers reports the highest Return on Assets. BCE is slightly better than Telus in generating profit per dollar of assets. • Risk and return are correlated. Rogers has the highest degree of leverage, and also the highest Return on Equity. However, BCE is the least leveraged but generates a better ROE than Telus. • There is a consistent relationship between the Debt/Equity ratio and the Leverage (Assets/Equity) ratio, such that Assets/Equity = Debt/Equity + 1. This is in keeping with the balance sheet equation, Assets = Debt + Equity. In addition, the industry ratios are useful in generating the following additional insights: • BCE underperforms the industry in all respects. • All three companies underperform the industry in terms of cost control, as suggested by their lower profit margins. • All three companies are also more highly leveraged than the industry as a whole. • Rogers outperforms the industry with a significantly higher Return on Equity, which is in line with its significantly higher level of Leverage. • Rogers is above the average in terms of Asset Turnover. Telus does slightly better than the industry as a whole in this respect. • Note that the industry ratios are based on six telecommunications companies, BCE, Roger, Telus and three other much smaller companies. Together BCE, Rogers and Telus make up over 95% of the industry, based on revenues and 93% based on assets. These industry ratios are calculated based on the unweighted means of the individual company ratios. Thus the relative size of industry players is not factored in to the determination of the industry ratios. The three smaller companies included in the industry are clearly more profitable than BCE, Rogers, and Telus. The smaller companies are also significantly less leveraged than the three larger companies. This provides an opportunity to discuss some of the challenges of finding and interpreting appropriate industry ratios for comparison purposes.

Part 2: DuPont Model This second part of the case could start with a presentation on the origins of the DuPont Model. As Easton, et al. (2013) explain, the idea of disaggregating Return on Equity (ROE) in three components International Journal of Case Method Research & Application (2014) XXVI, 2 97

(profit margin, asset turnover and leverage) was first suggested by the E.J. DuPont de Nemours and Company in the 1920s and 1930s to assist their managers in performance evaluation (see also Fridson and Alvarez, 2011; Palepu and Healy, 2013; Pratt and Hirst, 2009; Robinson, et al., 2012). The benefit of this disaggregated model is that it incorporates an investment perspective into performance measurement. It forces managers to focus on all aspects of performance that contribute to increase ROE. Sales volume, cost control, efficient asset utilization, an appropriate level of leverage, and high return on investment are all facets of performance that managers must take into consideration in their operating decisions. The following chart presents the components of the DuPont Model for each of Rogers, BCE and Telus.

Profit Margin X Asset Turnover X Leverage = ROE

NI/Sales x Sales/Assets X Assets/Equity = ROE

Rogers 0.1254 x 0.7032 X 4.3770 = 0.3860

BCE 0.1260 x 0.4601 X 2.2830 = 0.1323

Telus 0.1057 x 0.4990 X 2.3900 = 0.1261

Several observations can be made about the three companies based upon the DuPont model: • Success in managing day to day operations is reflected in Return on Assets (Profit margin x Asset turnover). BCE and Telus have similar ROA (5.8% and 5.28%, respectively). However, they achieve the same level of performance in different ways. • BCE has a slightly better cost control (higher profit margin) than Telus, but a slightly lower average asset turnover. • Rogers has a similar cost control to BCE but outperforms the industry in their ability to use their assets to generate sales. Canadian students may have personal experience with Rogers’ marketing strategies, which attempt to sell additional services to their existing customers, allowing them to generate additional sales with no additional investment in assets. As a result, Rogers does much better than their competitors in terms of return on assets. • BCE lags behind both Rogers and Telus on asset turnover. BCE is the oldest of the companies. Many of its assets may have been acquired at a time when the telecommunications industry required extensive investment in physical infrastructure to support communications based on land lines. These legacy assets may make it difficult to generate a high asset turnover, as the industry has changed to cellular and wireless communications, while BCE still has a lot of its original assets. • The DuPont model highlights the distinction between strategic operating decisions and strategic financing decisions. Different managers may well be responsible for these different choices. Thus, it is appropriate to evaluate the ROA and Leverage decisions separately for their individual contributions to the ROE. • Rogers not only offers a better return on assets, their high degree of leverage effectively multiplies their average operational performance to yield the highest returns to the owners of the company. The multiplicative impact of return on assets and leverage is significant in their case. In comparison to Telus, BCE’s low level of leverage is compensated for by a better return on assets that globally generates a better ROE. • Note that the use of leverage is a double-edged sword. When operating results are strong, the multiplier effect of leverage is beneficial. When operating results are poor, higher levels of leverage multiply the negative effects of poor performance. Thus highly leveraged companies may have larger swings in their ROEs. 98 International Journal of Case Method Research & Application (2014) XXVI, 2

Part 3: Companies’ operating and financing strategies Depending on the group’s level of knowledge, it might be relevant at this point to recall the role of rating agencies such as Standard & Poor’s and Moody’s in providing market participants with an assessment of the credit risk related to debt instruments issued by companies. It might also be necessary to recall the different aspects that are considered in corporate governance ratings, including board composition, compensation, shareholder rights, and disclosure. The selected additional information provided in Part 3 is helpful to understand and explain the differences in the companies’ operating and financing strategies. Rogers. Rogers is majority family-owned or controlled. The high level of leverage Rogers has may be consistent with the family being comparatively unwilling to contribute their own money to equity. Thus, they borrow more than the other companies. This additional debt makes them riskier (as reflected in their lower credit rating scores). However, most of the gains to this increased risk accrue to the family itself, leading to a high return to the family on their limited equity contribution. Family control over the company may also be partly responsible for Rogers’ comparatively lower corporate governance scores, since board independence from management is a key component of corporate governance, and the degree of independence is generally less for a family-controlled company. This is borne out by Rogers’ Board Composition Score of only 14/31 in the Report on Business Corporate Governance Rankings, compared to 23/31 for BCE and 24/31 for Telus. 4 As a family-controlled company, Rogers has more discretion in the corporate dividend policy. This might explain why their dividend payout ratio is lower than their two competitors, highlighting their ability to retain their earnings to fund growth opportunities. In fact, they have a high degree of latitude in deciding whether to pay dividends or to reinvest profits. Thus their dividend payout ratio might be more volatile than for widely held companies. BCE. BCE is a fairly mature company. It is widely held, with a corporate governance score that suggests widely held corporations are more likely to be governed in accordance with best practice guidelines for corporate governance. BCE is notable for its high dividend payout ratio of 62%, suggesting the company’s maturity (it does not appear to retain much of its earnings for reinvestment) and/or that BCE shareholders expect to receive returns from BCE through a steady stream of cash dividends, and not as much through share appreciation. BCE’s leverage is the lowest among the three companies, and this relatively low degree of risk is reflected in strong credit scores. Telus. Telus is a widely-held company. It has a dividend payout ratio similar to BCE, suggesting that their shareholders might also have a preference for a steady stream of dividends. It is interesting to see that although Telus is more leveraged than BCE, Moody’s sees this company as being less risky than BCE. Telus corporate governance scores are also moderately strong.

Recommendations for clients and students’ preferences Chris can use the ratios, DuPont model analysis, and other information in the case to explain the performance of each company to his clients. Based on this information and her personal profile, Anu would probably prefer to invest in Rogers. Since she is risk seeking, she might be attracted by this company for their high ROE generated by higher leverage, which means higher risk, and higher asset turnover. Dan is more risk averse and might prefer BCE for their low level of debt. His need for steady streams of cash would be filled by BCE’s high dividend payout ratio, and his concerns about corporate management exercising due care would be tempered by BCE’s strong corporate governance ranking. Students’ different responses can be used to discuss the fact that different individuals (Anu, Dan and each student) and different companies hold different risk preferences or tolerances, ranging from risk seeking through to risk averse. Just as financial ratios can reveal a lot about a company’s operating and financing strategies, a student’s response to these ratios can reveal a lot about their own personal risk preferences and investment strategies.

International Journal of Case Method Research & Application (2014) XXVI, 2 99

ENDNOTES

1. Canadian ICT Sector Profile, Industry Canada, Information and Communications Technologies Branch, March 2013, http://www.ic.gc.ca/eic/site/ict-tic.nsf/eng/h_it07229.html (accessed June 25, 2013).

2. ibid.

3. ibid.

4. ‘Board Composition’ is a scale within the Report on Business Corporate Governance Rankings which assesses factors such as: What percentage of the company’s directors is fully independent of management? What percentage of the audit, compensation, and nominating committees are fully independent? Are the Board Chair and CEO positions held by different individuals? How many directors sit together on other boards? Do any directors sit on a significant number of corporate boards? Are women included on the board? Does the board have a system to evaluate its own performance? Do independent directors meet without management present? Is information provided about the succession planning and director education processes? For more details on the methodology for determining Corporate Governance Scores, see http://www.theglobeandmail.com/ report-on-business/careers/management/board-games-2010/board-games-methodology-corporations /article1315295/

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