Parliament has called the CEOs of Canada’s big three telecoms to appear before a committee 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 Inc. (BCE-T), Telus Corp. (T-T), and Rogers Communications Inc. (RCI.B-T) 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 a BCE share for $59.24, and in March, 2022, they were trading in the $70 range. The annual dividend in 2019 was $3.17 a share, to yield 5.4 per cent. Today, the stock trades at $50.15 and pays $3.99 annually, to yield just under 8 per cent. However, adjusted net earnings in 2023 were only $3.21 a share. BCE is paying out more than it earns.
The Telus story is similar. In March, 2019, shares were trading at $24.73, compared with $23.83 today. The annual dividend was $1.05, to yield 4.4 per cent. With the recent dividend hike to a fraction over $1.50 a year, the yield is 6.3 per cent. But adjusted earnings per share last year were only 95 cents, well below the dividend payment.
Shares in Rogers Communications could be purchased for $71.87 five years ago. Rogers was paying a quarterly dividend of 50 cents at the time ($2 a year), to yield 2.8 per cent. It hasn’t increased the dividend over the years, but the drop in the share price to $60.39 has pushed the yield up to 3.3 per cent. Rogers posted adjusted earnings per share of $4.59 in 2023, so its dividend is well covered.
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 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.
Here are updates on the three companies.
BCE Inc.
Background: BCE is Canada’s largest communications company, providing a comprehensive suite of broadband, mobile, landline, and cable communication services to residential and business customers through Bell Canada and Bell Aliant. Bell Media is the company’s multimedia arm, with assets in television, radio, and digital media. Television assets include the CTV television network and many specialty channels. The company also owns the Crave streaming service.
Performance: The share price has trended sharply lower over the past month. The announcement that the company plans to lay off 4,800 employees clipped another few dollars off the price.
Recent developments: Fourth quarter and year-end results made a business case for the announced cutbacks. Revenue was only up 0.5 per cent for the quarter and 2.1 per cent to $24.7-billion for the full 2023 fiscal year.
Net earnings for the fourth quarter were $435-million (42 cents per share), down from $567-million (58 cents a share) the year before. For the full year, earnings were $2.3-billion ($2.28 a share), compared to $2.9-billion ($2.98 a share) in 2022.
Adjusted earnings for 2023 were $2.9-billion ($3.21 a share), down from $3.1-billion ($3.35 a share) the year before.
Dividend: Despite the drop in earnings, BCE increased its dividend by 3.1 per cent to 99.75 cents per quarter ($3.99 per year). That pushed up the forward yield to almost 8 per cent.
Outlook: For fiscal 2024, the company expects revenue growth of 0-4 per cent. Free cash flow growth guidance was negative 11 per cent to negative 3 per cent.
Telus Corp.
Background: Telus Corp. is Canada’s second largest wireless telecom company after Rogers Communications Inc. Its core business includes internet and mobile phone service through the Telus and Koodo brands. It recently spun off Telus International, which provides IT and customer service. It is using that as a model to grow its healthcare and agriculture businesses with an eye to spinning them off as well.
Performance: The stock continues to struggle. The shares are down about 18 per cent from their 52-week high, reached last April, and are slightly cheaper now than they were five years ago at this time.
Recent developments: The company released fourth quarter and 2023 year-end results that were uninspiring from the standpoint of investors. Fourth quarter operating revenue was $5.156-billion, up 2.6 per cent from the same period in 2022. Adjusted net income was $341-million (24 cents a share), almost exactly the same as in the same quarter the year before. Free cash flow for the three months to Dec. 31 was $590-million, compared to $323-million the year before.
For the full 2023 fiscal year, operating income was $20.1-billion, up 9.3 per cent from $18.4-billion in 2022. However, adjusted net income was $1.3-billion (95 cents a share) compared to $1.6-billion ($1.18 per share) in the prior year. That was down 19.5 per cent on an EPS basis. Free cash flow for the full year was $1.8-billion, up 38.1 per cent from $1.2-billion the year before.
CEO Darren Entwistle referred to 2023 as a year when the company had to navigate a “highly competitive industry, a challenging macroeconomic landscape, and a dynamic regulatory environment.”
Despite this, the company recorded record customer net additions of 1,266,000, surpassing the previous record high in 2022 by more than 21 per cent.
Dividend: The company raised its quarterly dividend by 7.1 per cent to 37.61 cents per share ($1.5044 a year), effective with the December payment. The shares yield 6.3 per cent at the current price.
Outlook: It’s a tough environment for telecoms at present. Like BCE, Telus is laying off staff and seeking to reduce costs. Growth in 2024 is expected to be modest. The high dividend is a concern, and the stock has negative momentum.
Rogers Communications Inc.
Background: Rogers is Canada’s largest wireless and cable company.
Performance: The shares traded as low as $50.15 in October but have been on an uptrend since.
Recent developments: Revenue and profit rose sharply in fiscal 2023, due in large part to the completion of the merger with Shaw Communications.
The company reported total revenue of $19.3-billion for the year, up 25 per cent from $15.4-billion in fiscal 2022. Adjusted net income was $2.4-billion ($4.59 a share). That was up 21 per cent on a per share basis. Free cash flow was $2.4-billion, up 36 per cent.
“We delivered industry-leading results in the fourth quarter and for the full year,” said CEO Tony Staffieri. “We led the industry in growth, exceeded our Shaw targets, and delivered a number of innovative firsts to Canadians. We’ve delivered eight straight quarters of growth and I remain very confident in our future. Our industry leading growth targets for 2024 reflect continued momentum and disciplined execution.”
Dividend: The payout of 50 cents a quarter hasn’t changed since March 2019. The stock yields 3.3 per cent. The current payout is well protected, and the company could easily afford an increase.
Outlook: Rogers is forecasting an increase of 8-10 per cent in total service revenue. Adjusted EBITDA is expected to grow by 12-15 per cent, while free cash flow is expected to be in the range of $2.9-$3.1 billion compared to $2.414-billion in 2023.
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 the editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape