Analysts are growing worried about Canadian telecom stocks as a pricing war emerges among the biggest wireless players, raising concerns over whether investors should be relying on the traditionally stable – and dividend-rich – sector right now.
But hold on a minute: The cautious outlook from the pros comes at a time when share prices for the likes of BCE Inc. BCE-T and Telus Corp. T-T have already tumbled from their recent highs, pushing dividend yields to levels that offer a decent cushion against a further downturn.
Curiously, telecom stocks weren’t weighed down in the weeks after Rogers Communications Inc. RCI-B-T completed its takeover of Shaw Communications Inc. SJR-B-T in early April. That was a gargantuan $20-billion deal that threatened to shake up the normally sleepy telecom sector and took two years to win regulatory approval from Ottawa.
As part of the agreement, Rogers sold Shaw’s Freedom Mobile wireless division to Quebecor Inc. in a side deal that the approving Competition Tribunal said would create a “more aggressive and effective” wireless competitor. Also, the takeover of Shaw meant that Rogers could bundle its smartphone offerings with other services, such as cable and internet in Western Canada.
But, initially, investors weren’t so put off by the prospect of beefed-up wireless players. After the deal closed on April 3, BCE shares climbed more than 8 per cent over the next month. Telus (full disclosure: I own shares) rose nearly 7 per cent over the same period.
The rally didn’t stick, though.
Over the past month, BCE has given up all its gains since the Rogers-Shaw transaction and Telus has slumped to a two-year low. Even Rogers’s share price has fallen more than 12 per cent over this period.
One possible culprit behind the selloff: Both BCE and Telus reported lower first-quarter profits at the start of May, offering investors a taste of what could be developing as the telecom sector adjusts to new competition, along with the simmering threat of an oncoming recession.
A second culprit: Bond yields have remained stubbornly high amid persistent inflation. The yield on the five-year Government of Canada bond has risen from about 2.9 per cent at the start of May to more than 3.5 per cent on Friday (yields rise as bond prices fall), close to it highest level over the past year and offering stiff competition to dividend stocks.
But some analysts are turning their attention to a third, and somewhat more troublesome, threat: a price war for smartphone services.
Freedom is undercutting competitors with wireless plans for as low as $39 a month – $50 for a beefier plan with more data – and competitors are responding with price cuts to some of their wireless brands.
“The Canadian wireless landscape has historically seen relatively disciplined behaviour from industry participants. However, we have seen periods of elevated competition and we believe that we are heading into another of these phases,” Stephanie Price, an analyst at CIBC World Markets, said in a note this week.
She looked at a previous period of heightened competition in the telecom sector – 2017 to 2019, when Shaw and Quebecor rolled out attractively priced services. By 2020, the market share held by BCE, Telus and Rogers had fallen from 80 per cent to 64 per cent.
Maher Yaghi, an analyst at Bank of Nova Scotia, expects that lower wireless prices could linger, given the agreements Quebecor signed to gain regulatory approval to buy Freedom.
“We think it will be hard for Quebecor to increase prices anytime soon,” Mr. Yaghi said in a note this week.
So why pick a side in a price war?
The flurry of uncertainty facing the telecom sector is already weighing on share prices, and lifting yields to levels that are hard to ignore: 5.7 per cent for Telus and 6.3 per cent for BCE, which is historically a bullish level for the stock.
High yields for big, profitable companies can limit the downside risk for share prices, especially if bond yields eventually subside.
Another reason is that the bigger telecom players have a powerful weapon in their favour: bundled plans, which can keep customers onside with attractive discounts when they subscribe to other services, such as cable and internet.
These are uncertain times for the Canadian telecom sector as companies adjust to a megadeal that is undercutting their pricing power.
But for long-term investors looking for a solid source of income from stocks, rising competitive pressures may be more of a gift than a threat.