The late, unlamented 2022 was a ho-hum year for Canadian telecommunications stocks. The S&P/TSX Communication Services Index was down 4.7 per cent for the year, although with dividends added, the sector virtually broke even.
But while it wasn’t an exciting year in terms of share prices, it was quite dramatic in other ways. For several weeks you couldn’t pick up a newspaper or watch a television news show without learning the latest update on the messy firing of CTV news anchor Lisa LaFlamme by Bell Media. That story wins first prize as the PR Disaster of the Year.
The other big telecom story was far more important economically but tended to be confined to the business pages. That was the Rogers-Shaw saga, which seems like it’s been dragging on forever. Actually, it’s been almost two years.
On March 15, 2021 Rogers Communications Inc. (RCI.B-T) announced a $26-billion deal (including debt) to buy all of Shaw Communications Inc.’s A and B shares (SJR.A-T, SJR.B-T) for $40.50 apiece. After numerous hearings and a failed mediation process, the Competition Bureau came out against the merger, only to be overruled by the Competition Tribunal.
The case is now headed to the Federal Court of Appeal. The market seems to believe the deal will get done; shares of Shaw closed last week at $38.37, about $2 below the offer price. But given the many twists and turns this takeover bid has taken, who knows?
If the Court of Appeal upholds the Competition Bureau and rules against the merger, expect a sharp drop in the price of Shaw stock to below $30. With so little upside potential, I would not advise buying Shaw at this point.
What about Rogers? The company won’t release fourth-quarter and year-end results until early February, but returns for the first nine months of 2022 show modest improvements across the board. Revenue was up 5 per cent, year over year, to $11.2-billion. Adjusted net income was up 3 per cent to just under $1.4-billion ($2.66 a share). Especially encouraging was a gain of 448,000 (137 per cent) in net wireless additions for the nine months to the end of September. So, the business as currently constituted is operating well.
That said, there are three reasons I would avoid the stock right now. The first is the merger. If it goes through, as I expect it will, it will give Rogers a dominant presence in Alberta, a market where it’s a minor player right now. But one of the gems in the Shaw empire, Freedom Mobile, is to be sold to Quebecor to meet competition concerns. The implications of that for future growth in Rogers’ wireless network are obvious.
Another concern is the expected $1-billion in synergies that were expected to be achieved in the first two years after the deal. At the time of the original announcement, Rogers said “the transaction will be significantly accretive to earnings and cash flow per share as of the first year after closing”. As past takeovers in other industries have shown, it’s one thing to promise synergies and savings, but sometimes quite another to deliver.
Finally, Rogers has never been very generous with its shareholders. It hasn’t raised its dividend since March, 2019, and currently pays only 50 cents per quarter ($2 per year) to yield 3.1 per cent. Plus, the stock is trading at below its price in January, 2019. No capital gain in four years? A stingy dividend? Let’s look at two other telecoms recommended by my Internet Wealth Builder newsletter and see if we can do better.
BCE Inc.
Background: BCE (BCE-T) is Canada’s largest communications company, providing a comprehensive suite of broadband, mobile, land line 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 of the country’s most-watched specialty channels.
Performance: The stock hit a 52-week high of $74.09 in early April, but it has been trending downward since. Because of the large investments BCE makes to upgrade infrastructure, telecom stocks are interest sensitive. The sharp rise in interest rates in 2022 was therefore a major headwind for the stock.
Recent developments: The share price took a hit, but BCE’s business continued to do well in 2022. Third quarter results showed a year-over-year increase of 3.2 per cent in operating revenue to just over $6-billion. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was ahead 1.2 per cent to $2.59-billion while adjusted new earnings came in at $801-million (88 cents a share), up from $748-million (83 cents a share) in 2021. Free cash flow was $642-million, a 13.4 per cent advance over the previous year.
The company reported 401,132 total broadband net customer activations, a new record. Of these, 224,343 were mobile phones, 49,044 mobile connected devices, 89,652 retail internet and 38,093 IPTV (internet protocol television).
Balance sheet: The company says its balance sheet is very healthy with $3.5-billion of available liquidity, which includes $583-million in cash. BCE has a high proportion of fixed-rate debt, a substantial pension solvency surplus across its major defined benefit plans, and relatively low cyclicality for most of its revenues that helps to mitigate the financial impact of rising interest rates and macroeconomic uncertainty.
Dividend: The stock paid a quarterly dividend of 92 cents ($3.68 a year) in 2022, to yield 5.9 per cent at the current price. If historical trends continue, we should see a dividend increase in the current quarter.
Outlook: There’s nothing exciting about this stock (except, of course, the Lisa LaFlamme firing). This is a money-spinning telecom giant whose major attraction is an outsize yield.
Telus Corp.
Background: Telus (T-T) is Canada’s second-largest wireless telecom company after Rogers. 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 health care and agriculture businesses, with an eye to spinning them off as well.
Performance: The stock is interest sensitive. As a result, it has been on a downward trend since touching an all-time high of $34.65 last April.
Recent developments: Telus continued its strong growth pattern in the third quarter. The company reported total Mobile and Fixed customer growth of 347,000. That was up 27,000 over the previous year and was its strongest quarter on record.
Mobile phone net additions were 150,000, a 15,000 increase over the prior year and the best quarterly result since 2010. Telus also reported record high connected device net additions of 124,000, up 14,000, year over year.
Telus reported third quarter income of $4.7-billion, an increase of 9.9 per cent over $4.3-billion in the same period in 2021. Adjusted net income was $471-million (34 cents a share, basic). That compares to $392-million (29 cents a share) in 2021. On a per share basis, the increase is 17.2 per cent.
Adjusted EBITDA was $1.7-billion, up 10.7 per cent from the previous year. Free cash flow was $331-million compared to $203-million a year earlier, an increase of 63.1 per cent.
The company also reported good results from Telus International and subsequently announced it has acquired 1.4 million additional shares in the spinoff company.
“Our purchase of additional shares of Telus International reflects its importance to Telus, and our strong belief that this represents an attractive investment opportunity, particularly at current share price levels,” commented CEO Darren Entwistle. “The purchase of these shares is also reflective of the compelling prospects and robust profitable growth trajectory of the Telus International organization, benefitting from the significant synergies across the Telus business, particularly Telus Health and Telus Agriculture & Consumer Goods.”
Dividend: Telus announced a 7.2-per-cent increase in the quarterly dividend, to 35.11 cents ($1.4044 a year), effective with the December payment. The stock yields a very attractive 5 per cent at the current price.
Outlook: The company’s growth rate is impressive, and the likely future spinoffs of the health and agriculture units should benefit shareholders. The stock looks extremely oversold at the current price.
If you can only choose one for your portfolio, I’d give the nod to Telus. The yield is lower than BCE, but its health and agriculture operations will likely lead to profitable spinoffs.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe
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