Over the last 5 years, the top Canadian telecom companies have suffered. Not due to their own faults, but primarily due to economic conditions.
Prior to the pandemic, we were in a constant state of rising interest rates. And, if you understand how a telecom company’s business model works, you’d likely understand why high interest rates weigh these companies down.
Utility companies like Fortis, Enbridge, and Canadian telecoms rely on high amounts of debt to expand infrastructure.
Obviously, if your credit card company contacted you today and told you they were slashing your interest rate, that would ultimately put more money in your pocket.
The same can be said for these companies.
So, now that we are in a low interest rate environment, what are the best Canadian stocks in telecoms to be scooping up right now?
I’m going to highlight 3 in this article today, and provide some solid research as to why.
Keep in mind, I could have simply named the Big 3 and be done with it. However, I mixed it up a bit and went with 2 major players and an off the board pick.
Canadas top telecom companies to buy right now
Shaw – BCE – Telus dividend adjusted return over the last 5 years
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Shaw Communications (SJR.B)
Market Cap: $11.79 billion
Forward P/E: 18.20
Yield: 5.15%
Dividend Growth Streak: 0 years
Payout Ratio (Earnings): 89.77%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 0.00%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
Shaw Communications (TSE:SJR.B) is my off the board pick for Canadian telecom companies. It wouldn’t be any fun if I just included a list of the 3 major players, which hold over 92% of the market share here in Canada when it comes to telecom revenue.
Shaw Communications started in 1971 and has built one of the most reliable fiber networks in the country. Since 2013, Shaw Communications has invested over $30 billion in infrastructure to build, upgrade, and expand its network.
The company focuses on providing some of the best internet services in the country to Canadians. In fact, over 2 million of the company’s 7 million customers are either retail or business internet subscribers.
Recently however, the company has been making aggressive moves to become more prominent in the mobile space, a sector dominated by the Big 3 telecom companies. Because barriers to entry are so difficult and market share is so hard to come by, this is a bold move for the company.
Year over year, the company has added around 163,329 wireless customers, which signals a 10% increase in its total customer base. This is a pretty solid accomplishment. The concerning thing however, at least over the short term, is the company’s overall customer base is decreasing due to an issue every telecom company is going through right now.
And that is a loss of video, land line, and cable revenue. Year over year losses of customers in the company’s retail cable, satellite, and land line services is becoming an issue. The market share that Shaw Communications is capturing, is being eaten up by losses in these departments.
The Big 3 are diversified enough elsewhere that this isn’t having as prominent of an effect.
So, with all the doom and gloom, why am I highlighting Shaw as one of the best telecom plays in Canada right now?
Well for one, the company does pay a 5%+ dividend yield, and distributes it on a monthly basis. But most importantly, I think the company could be a prime candidate for a takeover bid or an acquisition. We saw Rogers aggressively try to acquire Cogeco earlier in 2020. So who’s to say a company won’t step up and offer a solid price for Shaw shareholders?
The possibility is there, and it’s one that investors who are looking for a little more “risk” in the telecom sector may want to take a closer look at.
The company has struggled in 2020 in terms of share price, losing just over 15%. As of writing, Shaw is trading at a 12% discount to its historical price to sales, and 6% discount to its historical forward price to earnings.
BCE (TSE:BCE)
Market Cap: $51.2 billion
Forward P/E: 18.86
Yield: 5.88%
Dividend Growth Streak: 11 years
Payout Ratio (Earnings): 107.42%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 5.00%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
Not only is BCE (TSE:BCE) one of Canada’s largest blue-chip companies, it’s also one of the most reliable telecom companies in Canadian history.
At the time of writing, BCE has a market cap of around $51 billion. This makes it the largest telecom company in the country by a wide margin.
In terms of revenue breakdown, the company makes the bulk of its revenue through its Wireline broadband and TV segment at 53%. However, wireless falls closely behind it at 37%.
The company has over 22 million subscribers, and while major players like Telus and Rogers are centralized mostly in western and eastern Canada respectively, BCE is prominent across the country. The company claims to have the ability to provide services for 99% of the Canadian population, touting it has the best and largest wireless network in the country.
The company also has the highest yielding dividend out of all the Canadian telecom companies and at the time of writing yields 5.90%. The company’s main goal is to keep dividend payout ratios between 65-75% of free cash flow.
According to our dividend screener over at Stocktrades Premium, BCE’s dividend payout ratio is currently 69% of free cash flows, which is right in line with its primary goal.
The company has grown its dividend for 11 straight years, making it a Canadian Dividend Aristocrat. And, over the last 5 years it has grown its dividend at a 5.10% clip annually. Considering we were in a rising interest rate environment and the economic situation has changed, we may be able to expect higher dividend growth from BCE in the future.
The company has a dominant presence in the media, so much so that the CEO of smaller regional company Quebecor (TSE:QBR.B) stated “BCE must be stopped” after media acquisitions added to its already dominant presence in Canada.
In terms of growth however, BCE has been fairly lackluster over the last 5 years. The company has actually lost 6% in terms of dividend adjusted returns over the last half decade, revenue is flat and earnings have been shrinking at a 3.7% pace annually over the same timeframe.
Despite BCE’s lackluster performance, they’re still one of the better telecom plays in the country, and I would expect growth rates to accelerate in the current environment.
Valuation wise, this company is trading at neither a discount nor a premium, historically at least. With a forward price to earnings of 17, this is only 0.2 higher than what it typically has traded at over the last 5 years. And, in terms of price to sales, it is right in line with 5 year historical averages at 2.2.
If you’re looking for a reliable blue-chip option that is probably going to perform better in the next 5 years than it did the previous 5, BCE may be your option.
However, if you’re looking for growth, you may want to have a look at our next option.
Telus (TSE:T)
Market Cap: $31.61 billion
Forward P/E: 22.29
Yield: 5.06%
Dividend Growth Streak: 16 years
Payout Ratio (Earnings): 98.31%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 7.26%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
Telus (TSE:T) is Canada’s second largest telecom company, behind only BCE. The company currently has a market cap just shy of $32 billion at the time of writing and provides internet, phone, and television services to over 10 million Canadians.
The company is more prominent in western Canada, and Telus primarily sneaks under the radar due to the fact it doesn’t have a media division. While companies like Rogers and Bell are everywhere you go, whether it be television networks, sports teams, or sponsorships on sports arenas, Telus is quietly expanding into other areas, primarily those with a much higher ROI than media.
The company is quickly expanding into security, telehealth, and AI technologies. Its most recent acquisition of Lionbridge AI and AFS Technologies further enforces the company’s different approach to growth.
In terms of the Big 3, Telus has been the best performing in terms of share price over the last half decade, by a wide margin actually. While a company like BCE has lost 6%, Telus has put up 18% share growth.
In terms of dividend growth, the company is also best in class. Its 16 year dividend growth streak is the longest in the telecom sector, and its 5 year dividend growth rate of 8.18% is the highest out of the Big 3.
It can’t keep up with smaller, faster dividend growth stocks like Quebecor and Cogeco, but you have to keep in mind you’re getting the stability and defensive reliability of a Big 3 telecom here. I’ll take a smaller dividend growth rate for that any day of the week.
In terms of valuation, there is no doubt Telus is expensive right now. The company is currently trading at 20.9 times earnings, which is a near 30% premium to its historical averages.
Overall, these 3 Canadian telecom options are excellent choices
There is no question that the Canadian telecom sector has one of the widest economic moats in North America. There’s a reason very few companies have been able to penetrate the space, and companies from the United States who have attempted to take a stab at Canadian telecom have generally given up.
There are so many government restrictions, and most customers are completely happy continuing with Rogers, Telus, or BCE.
As a result, this creates a reliable stream of revenue for these companies and as a result dividend growth and payments are usually stable.
Rogers missed the list this year primarily due to a lack of dividend growth. Shaw is a nice contrarian play, and provides investors willing to take on a little more risk for more reward with a potential acquisition target in the future.
The post The Top Canadian Telecommunication Stocks to Buy Now appeared first on Stocktrades.
