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Telecom April fool?

Published on 04-01-2024

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Are they bargains or value traps?


Parliament called the CEOs of Canada’s big three telecoms to appear before a committee on March 18 to explain the high rates they charge for wireless and broadband. Perhaps our MPs should be more concerned about the state of the industry itself. It’s not great.

In fact, the shares of BCE, Telus, and Rogers are cheaper today than they were five years ago at this time. BCE and Telus have raised their dividends several times over those years, pushing yields to unusually high levels.

Consumers and politicians have bemoaned our sky-high wireless rates for years. But no one has found a solution that would significantly reduce them. Our small population and massive geography combine to create a huge cost burden on telecoms seeking to expand or upgrade their networks. And none of these companies seems happy with the regulatory environment the government has imposed on them.

It's not that our telecoms are in danger of going out of business. All continue to post decent profits. But growth is extremely slow and bottom lines are tight, despite significant layoffs throughout the industry. And concerns are being raised about whether the current dividend levels are sustainable for BCE and Telus.

Five years ago, in March 2019, you could buy BCE Inc. (TSX: BCE) for $59.24. In March 2022 they were trading in the $70 range. The annual dividend in 2019 was $3.17 a share, to yield 5.4%. Today, the stock trades around $46.00 and pays $3.99 annually, to yield 8.7%. However, adjusted net earnings in 2023 were only $3.21 a share. BCE is paying out more than it earns.

The Telus Corp. (TSX:T) story is similar. In March 2019, shares were trading at $24.73, compared to $21.46 recently. The annual dividend was $1.05, to yield 4.9%. With the recent dividend hike to a fraction over $1.50 a year, the yield is 6.3%. But adjusted earnings per share last year were only $0.95, well below the dividend payment.

Shares in Rogers Communications Inc. (TSX: RCI.B) could be purchased for $71.87 five years ago. Rogers was paying a quarterly dividend of $0.50 at the time ($2 a year), to yield 2.8%. It hasn’t increased the dividend over the years but the drop in the share price to $55.77 has pushed the yield up to 3.6%. Rogers posted adjusted earnings per share of $4.59 in 2023, so its dividend is well covered.

Bargains or value traps?

So, are these telecom stocks bargains or value traps at current levels? I see them as bargains, but with a degree of risk. Here’s why.

First, interest rates are likely to decline later this year. Telecoms carry high debt loads, relating to their network expansions and upgrades. A reduction in borrowing costs should have a positive impact on bottom lines.

Second, the dividends work to limit the downside on these stocks. As interest rates drop, the high yields should put upward pressure on the share prices. The concern in the case of BCE and Telus is that unless profitability improves, either could implement a dividend freeze or even a cut.

Finally, ignore any talk of enticing a foreign player to boost competition in our wireless sector. No company would want to take the risk in the current environment, nor could Ottawa permit that to happen with the industry already struggling.

The bottom line is that we’re unlikely to see any major changes in the telecom sector in the foreseeable future. Look for slow growth, more cost cutting, and continued tension between Ottawa and the companies.

Based on 2023 results, Rogers is in the best financial position at this time. It would be my first choice, despite the low dividend yield.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.


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