Investing in Canada telecommunications stocks (telco stocks) has historically been seen as “orphans and widows stock”. They were super steady and boring, but it offered a very generous dividend. It was akin to a bond substitute (with much better returns!).
Editor’s Note: If you want to read our thoughts on the recent GameStop and Blackberry stock price chaos, see them here. Today, we’re talking about stocks that have made a lot of investors a lot of money… eventually – if not quickly.
Certainly this stigma still applies to the modern day telco, but the business lines have evolved and expanded along with the technological advancements – and how we communicate. Today, the telcos hook up our homes with internet and entertainment services. The large Canadian conglomerates sell us smartphones and other devices as well. The telecommunications oligopoly connects our businesses as well, from coast to coast to coast.
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Telcos are a Modern Day Utility
As the pandemic reinforced, we are a society that relies on technology to connect, communicate, and work. It’s part of our entertainment hub as well. That has never been more clear than in the last 11 months. The pandemic also accelerated many trends such as work from home.
Telcos are the most modern utilities, as they are an everyday essential, and we send them money every month just as we would to our electricity and natural gas provider. Many would say (not shareholders, notably) that we send them too much money. It’s quite normal to hear of families sending their Canadian telecommunications company of choice some $400 or $500 per month once you factor in cell phones for the kids, Mom and Dad, the home internet hook up and perhaps a TV package such as Bell Fibe or full package such as Rogers Ignite.
The telcos are highly regulated, and there is very little competition. OK, there’s no competition; they operate in an oligopoly situation. The regulatory protection and oligopoly situation give them a considerable moat. No competition is wonderful for investors, but it does not always guarantee business success. There is always talk in Canada of opening up for more competition in the telco space. But to date, that has all just been chatter, and there does not appear to be any true political movement to bring in the big international competitors.
Real competition may come one day from complete disruption such as from SpaceX Starlink that will beam the internet to the world from satellites. That is another venture from Elon Musk the CEO of Tesla. Yes, telco investors might want to keep an eye on the skies… or space that is.
The Best Canadian Telco Dividend Stocks
The Canadian telecommunications dividend stock space is dominated by BCE (BCE.TO), Rogers (RCI.B.TO), Telus (T.TO), Shaw (SJR.B.TO) and Cogeco (CGO.TO).
In fact you’ll find Telus in our Best Canadian Dividend Stocks for 2022 list:
I personally own Telus along with BCE. Telus is more of a pure play in wireless and many will see that as a strength, as there are reasonable growth prospects in that business line. Telus is also much more entrepreneurial than it’s Canadian telecommunications cousins with Telus Health as part of Telus International and also Telus Ventures. Telus also has a very strong brand and some of the most-liked advertising in Canada. They use nature’s imagery almost exclusively. The future is friendly – If you’re a Telus dividend collector that is!
I was very fortunate to work on that brand in my previous life as an advertising creative, so I know a thing or two about well the marketing has worked over the last few years.
BCE and Rogers are unique telecommunications stocks in that they own and produce their own media content. Rogers also owns The Toronto Blue Jays (the Rogers Centre where they play their home games). They also own and operate Rogers Sportsnet and many other TV and radio outlets.
Bell Media operates many stations that includes TSN (The Sports Network and RDS in Quebec) plus CTV. In 2019, Bell Media successfully rebranded specialty channels The Comedy Network, Space, Bravo and Gusto as CTV Comedy Channel, CTV Sci-Fi Channel, CTV Drama Channel and CTV Life Channel.
In a joint venture, BCE and Rogers own a 75% interest in Maple Leaf Sports, the holding companies whose most prized possessions are the Toronto Maple Leafs, the Toronto Raptors and Toronto FC.
While these media operations deliver alternative revenue streams, they can also bring additional risks. The media and sports arms have put a strain on the earnings of BCE and Rogers over the past few years. Of course, the pandemic put a halt to many professional sports, and then they were attempting to operate with limited regular seasons and modified playoff schedules. Also, many advertisers were feeling the ill effects of the pandemic and reduced their advertising budgets. BCE and Rogers had to accept a lot less for their commercial air time.
For example, Bell Media reported $628-million in operating revenues during the third quarter, down 16.4 per cent, or $123-million, from the same period last year.
A Surprising Total Return performance
And while we may think of these Canadian telco dividend stocks as being somewhat boring , we can see the value of the reinvestment of the generous dividends. Here’s a 15-year chart showing the big 3 of Telus, BCE and Rogers.
And speaking of those big juicy dividends, here’s the yield history. The chart is courtesy of Mike The Dividend Guy, who runs Dividend Stocks Rock.
We see that BCE and Telus are offering some very generous current dividends
Here was an example of the earning hit to Rogers, for the period ending June 30, 2020.
While the Canadian economy and the sports and entertainment industry is recovering, there are still scars and challenges.
Not Pandemic Proof
And while we were told to stay at home and work at home (requiring connectivity) the telco business was not pandemic proof. Roaming charges were almost eliminated as we were staying put, at home. And of course, the telco’s sales outlets are closed when parts of Canada go under lockdown or restricted store openings. These companies are not able to sell as many new devices.
Here’s a look at the long-term growth that the top telco dividend players have enjoyed.
Telus is a favourite telco of many investors including MIke from Dividend Stocks Rock. You can add my name to that list as well. Here’s a table showing more of the financial framework and history. The tables are courtesy of Morningstar.
Telus offers a very good growth story for a telco utility. In the latest quarter, reported on November 6, 2020, Telus delivered a 7.6% revenue increase year or year, and a very slight boost in earnings.
The Dividend Growth Story
The Canadian telco stocks are known to offer very generous dividends and solid dividend growth. When I run the four stocks of BCE, Telus, Rogers and Shaw as an equal weight portfolio, they would have increased their dividend income by 280% over a decade to the end of 2020 – with dividend reinvestment.
In the above chart, starting with a hypothetical $10,000 portfolio, the yield started at 5.0% (delivering just over $500) and increased to $1,428 according to portfoliovisualizer.com. Now imagine the income growth you can create when adding new monies on a regular schedule? Those generous dividends certainly can drive that total return.
Even if you don’t see generous total returns, if history repeats, (and it doesn’t look like competitors are on the horizon) you would build an incredible income stream. That can be more than useful when you reach that retirement stage. While stocks are not bonds, we might think of telcos as very good bond substitutes.
Dividend Growth Streak
- Telus 16 years
- BCE 11 years
- Shaw 0 years
- Rogers 0 years
Dividend Growth – Last 5 years
Here’s the total dividend growth from 2016 through 2020.
- Telus 28.6%
- BCE 22.0%
- Rogers 4.1%
- Shaw 0.0%
If we look at Cogeco, we see a 55% dividend growth for the period. In addition to the “Big 3” or “Big 4” you might also consider this regional (Quebec and US Atlantic) telecommunications superstar. They recently reported very strong results. Revenue increased 4.5% year over year for their Q1 ending.
Telcos Near Term Recovery
Here’s the analysts earnings projections for BCE. They are still fighting back. The table is courtesy of Nasdaq.
Net, net we might think of Canadian telco stocks as dividend income plays with some potential for capital appreciation over time. If you like that idea, you might buy the group. Or you might be more selective. I am happy with my one-two punch of BCE and Telus, but I also like the idea of Cogeco.
The Risks are Still Present
The risks are present. This is a very capital intensive business line. It takes enormous sums to build out and maintain the networks. They do carry considerable debt. There is the risk of rising rates that will increase borrowing costs over time, but these days they are able to feast on cheaper debt. I always keep in mind that if rates do rise, I have those Canadian bank dividend stocks that might prosper in a rising rate environment. It’s about that portfolio balance and teamwork when it comes to my investment team!
Morningstar analyst Mathew Dolgin suggests they are undervalued, even though the Canadian telcos will likely not get back to 2019 revenue levels until 2022. That is a very good 8 minute interview and worth a watch. They are a modest pandemic recovery play. And of course, BCE and Rogers will benefit when sports and sports broadcasting is back to more normal levels.
Mathew also likes Telus and BCE as his top picks. He saw BCE as the most undervalued from that November interview. The stock has not recovered from the time of that post, and still (possibly) represents good value.
That might be a good call, and perhaps it’s not time to hang up on your Canadian telco dividend stocks (bad puns are certainly intentional).
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