Canada’s telecommunications companies have come into favour recently as their juicy dividends make them the perfect fit for investors out there who crave income. When you can buy into class-leading companies and get the same immediate ROI as buying a Canada savings bond it’s not tough to see why the telecoms make such attractive investments right now. Despite an increasingly competitive environment, telecommunications has been the leading sector on the TSX this spring with 7% gains. Most experts don’t believe that this bull run will continue much longer for a variety of reasons. The companies are competing over an industry that accounts for 3.3% of Canada’s GDP, accounting for over 40 billion dollars in revenues annually. Similar to the Canadian Bank environment, Canadian Telecoms are on a small playground with very few players. This ensure that each of them can get their share of the market… and they share of revenue!
Historically, four major companies have ruled over the Canadian telecommunications landscape. The oligopoly was composed of Bell Canada Enterprises (BCE), and Rogers Communications (RCI/B) in the East, while Telus Coporartion (T) and Shaw Communications (SJR/B) were based out of the west. The four companies all have specific services that they excel at, but recently each of them has sought to take market share in as many areas as possible and the four have become increasingly diversified as a result. Until very recently these industry titans had little competition save for a few niche regional companies such as Manitoba Telecom Services (MBT) and Sasktel. This has rapidly been changing over the last year as the Canadian federal government has been encouraging more competition and foreign investment in the sector (especially in the quickly expanding wireless communications division). Still, these four companies control the vast majority of market share in cable, wireless, home phone, and internet industries, with an increasing stake in various media outlets. This has been (and will likely continue to be in the short term) a relative gold mine as Canadians routinely top the list for having some of the most expensive telecommunications services in the world. Some have claimed that this was because of the lack of competition relative to the market in the USA for example.
The recent run to big dividend players have left the four major telecom providers trading near their 52-week highs, and they are rated a “hold” by most investment services. An article in the Globe and Mail (itself partially owned by BCE) recently speculated that a bit of a downturn for the sector was probable due to the fact that inflationary pressures, combined with steadily increasing competition from the four industry leaders, as well as outside companies. This has been most noticeable in the area of wireless communications.
To try and carve out territory in this shifting landscape the companies have not only been seeking to move into each other’s traditional service specialities, but have also been buying up assets in the media sector as well. Most notably BCE has recently wrapped up its massive takeover of the Canada Television (CTV) company which had been the largest privately owned television company in Canada. Shaw (SJR/B) responded by buying the Western network of Canwest Global and all of their speciality channels, and Rogers (RCI/B) recently acquired the City-TV properties.
The Canadian Telecom industry has rewarded its shareholders over the last decade with large dividends that have steadily been increasing. At one point in time, even BCE and Telus considered switching to an income trust model to distribute higher payout. Unfortunately for investors, they were stopped by the Canadian Government that also ended the “income trust party” leaving only REITs with their unique tax advantage.
I believe that they will remain solid bets in the short and mid-terms due to their huge competitive branding edge and extensive infrastructure advantages; however, if you are looking for any sort of growth you way want to invest lightly in this sector. All four of the main players have great balance sheets with low debt-to-capital ratios, respectable P/E ratios, great cash flow, and most of all, attractive dividends. They are the definition of mature companies and are great picks to continue providing solid annual returns without consistent increases in revenues. Maxim Armstrong wrote the following his spring 2011 report on Canada’s telecommunications industry:
“Thanks to limited cost increases, the industry was able to increase its profits in 2010 even though sales growth had slowed; however, this achievement will not be possible in 2011. Profits are expected to decline as costs outpace revenues. Looking forward, weak price appreciates (the result of increased competitive pressures) and continued cost pressures will lead to slightly lower margins and stagnating profits.”
Given the new realities of our swiftly evolving telecommunications industry I think this is a pretty accurate prediction.
As far as trying to pin-point the best and worst stock picks out of the group, I would say the major wildcard in the sector is Rogers Communications (RCI/B) since it has by far the largest market share of the wireless communications segment. This income stream accounts for 66% of the companies overall revenues. With the wireless scene rapidly expanding, yet also seeing the strongest competition, Rogers (RCI/B) will almost assuredly be the most volatile of the “Big Four”. Personally this isn’t something I am looking for when I am evaluating solid dividend payers. My pick would be either BCE or Telus (disclaimer, I own shares of T right now) simply because they are leaders in their market (Quebec vs BC), stable, and most diversified of the companies. With many of the other balance sheet variables being equal and uniformly low growth opportunities across the sector, their high dividend yields are simply too large to ignore. Some might argue that there are better dividend options out there due to the fact that BCE Inc. did cut its dividend in the recent economic downturn in 2008, but this was consistent with every company in the sector and a quick recovery has subsequently been made.
Find our Canadian Dividend Stocks in Telecom Analysis Here: