October 23, 2014

TELUS Corp (T)

                                                                            

 

Telus Corporation (T) is one of Canada’s “Big Four” massive telecommunications companies (the others being Shaw Communications (SJR/B), Rogers Communications (RCI/B), and BCE Inc. (BCE).  After Canadian Banks, they are definitely part of the “favorite” Canadian dividend stocks! It was founded in 1996 through a merger of Ed Tel and AGT.  The company brings in about 10 billion dollars of annual revenue and has over 12 million customers across Canada.  There most important market is in British Columbia but Telus expanded at great speed over the past 10 years. These include 3.7 wireline customers, 1.2 million internet customers (the vast majority of whom are high-speed) and 300,000 television subscribers.  Telus (T) also has about 7 million wireless subscribers that now account for over half of revenue and earnings.  Telus has enjoyed the recent success in the Canadian telecom sector and raised its dividend 5% in the first quarter of 2011 after reporting a 20% increase in profit over last year’s numbers.  Much of this is contributed to the 11% jump in wireless subscribers Telus seen during the first part of the year.  Telus was so flush with cash that CEO Darren Entwistle had this to say about future dividend outlooks: “In keeping with my personal goals and the three-year targets that I’ve set for the organization to achieve in respect of earnings per share and free cash flow growth, Telus is targeting annual dividend increases of circa 10 per cent from 2011 through the 2013 time period.” This is music to the ears of income starved investors looking for immediate returns on their investments.

 

Telus AdUpcoming Opportunities and Dangers:

 

Telus (T) is much like its Canadian telecom brethren in that it has a strong balance sheet, enjoys great stability, but could be in for some stagnant growth due to competition and price pressures within the sector.  It has a nice dividend and has been doing a great job of stealing bits of market share from its main competitors, but I can’t see it mounting a series challenge to BCE Inc. (BCE) as the industry leader or exploding with growth anytime soon.

 

Whereas Telus’ top three competitors have chosen to commit serious resources to acquiring major television networks, Telus (T) has committed to renew its focus on its current services.  The CEO of the company Darren Entwistle commented on that decision in the globe and mail as saying, “We’ll take our money and invest it in broadband, wireline and wireless technologies.  That’s the area we know.”  Backing up this claim is the recent decision by the telecom to invest in the ultra-high-speed wireless technology known as Long Term Evolution (LTE).  This infrastructure has been looked at as the solution for large scale video streaming and dense downloading traffic.  Its main competition in the area is Rogers Communications (RCI/B), but Telus has said that it will begin launching this product in 2012.  Verizon and AT&T have begun deploying the technology already in the USA.

 

One rumour that Telus (T) just has not been able to shake over the last few years has been that of a takeover/merger with BCE Inc.  Telus has usually denied any truth to the talks, but industry insiders are suspicious to say the least.  When you objectively look at how BCE Inc. (BCE) has chosen to diversify in certain areas and allow Telus to actively compete with Rogers (RCI/B) in the wireless market, one really has to wonder.  If the merger were to begin the federal government would have to look seriously at the possibility of a monopoly within the industry.  Obviously such speculation would likely have a positive effect on the stock price for Telus (T) shareholders.

 

A strong case can be made for a company currently enjoying a larger and larger piece of the lucrative Canadian telecommunications market (over 40 billion in annual revenues) and one that is also committed to increasing its dividend over the next few years.

 

Telus (T) Canadian Dividend Stock Graph

TSE T

 

Telus (T) Canadian Dividend Stock Metrics

TickerNamePriceDividend YieldPayout RatioDEBT_TO_MKT_CAPDividend Growth 5 yearsDividend Growth 1 years
TTELUS Corp51.594.2662.090.413065316.628867.894731

 

Shaw Communications Inc (SJR/B)


 

Shaw Communications Inc (SJR/B) is at its heart a Western Canadian cable and satellite TV company (founded in 1966) that has rapidly been trying to diversify in order to compete with the other three major Canadian telecoms (Telus Corporation (T), BCE Inc. (BCE) and Rogers Communications (RCI/B).  Its recent forays into high-speed internet access and wireless communications have seen varying degrees of success.  Shaw’s most recent financial report shows a 29% increase in revenues over the same time period from 2010.  This is by far the sharpest increase in revenues out of the major telecoms and is due in large part to the acquisition of the Canwest Global family of TV networks, and increased digital cable subscribers.  It serves more than 3.4 million customers and boasts over 625,000 kilometres of fibre-optic cable laid.  Their satellite TV division reaches almost a million homes across Canada.

 

Shaw logoUpcoming Opportunities and Dangers:

 

The main difference between Shaw Communications (SJR/B) and the other “Big Four” Canadian telecoms is its specialization in the Cable and Satellite TV sectors.  It has around 60% of the market share in this area and a very solid market base in Western Canada (that was only strengthened by the purchase of the Winnipeg-based Canwest Global franchise).  For the short term at least, it appears that this characteristic will be a major competitive advantage.  The logic behind this assertion is that advertisers have begun pouring money back into the networks’ pockets and consequently television providers have seen their revenues and profits increase.  This has obviously been a boon to Shaw Communications (SJR/B) and their new division Shaw Media (the former Canwest Global) and their 19 speciality channels.

 

The increased competition in the wireless data and phone industries have left the other “Big Four” telecoms vulnerable where Shaw is not because of their very limited exposure.  They have invested some money in exploring different wireless opportunities, but with the state of the current marketplace my guess is that they will be highly selective on where they choose to engage their competitors.  I recently read a report put forth by TD bank that stated the following:

 

U.S. cable stocks have enjoyed a healthy recovery over the past six months, and TD Newcrest believes it’s a harbinger of what’s to come in the Canadian sector.

 

Despite declines in a key metric known as RGU, or revenue generating unit, U.S. cable valuations have rebounded and benchmark names Comcast and Time Warner Cable are now trading above six times earnings before interest, taxes, depreciation and amortization. That’s higher than telecom stocks AT&T and Verizon, TD analyst Vince Valentini points out in a report today.

 

By comparison, Canadian cable stocks are now trading at lower multiples than BCE Inc. and Telus Corp. – something Mr. Valentini believes won’t stick around for long.

 

“We expect a relative rally in Canadian cable stocks versus telco stocks over the next six months,” he wrote in a semi-annual review of the sector published today.

 

This makes a lot of sense, and with Shaw having a disproportionate stake in the cable industries relative to its competitors, it stands to benefit them most.

 

Shaw (SJR/B) has also recently benefited from its increased digital cable subscribers because the service is more expensive than basic cable and offers many more up-sells such as pay-per-view options.  This digital infrastructure could help them greatly in the future as a means of packaging other telecommunications services.

 

Finally, Shaw Communications (SJR/B) has recently focused on streamlining its organizational structure and consequently let go of 550 employees.  According to Shaw this is estimated to save the company over 50 million dollars.  Shaw CEO Brad Shaw had this to say on the matter, “Our industry is transforming and competition in our core business continues. We have taken decisive and immediate steps to streamline our organizational structure. In this changing landscape managing costs and operating efficiently are essential.”  Most analysts seen this as a positive long-term move that was necessary to compete with Telus (T), Rogers Communications (RCI/B), and BCE Inc (BCE).

 

Shaw has recently become a favourite of experts due to its advantageous position in the telecom industry and its 73.94% dividend growth over the last 5 years.  Personally, I think that wireless data is going to become a much more important aspect of the telecommunications game (albeit more competitive as well) and Shaw is the furthest behind in this field by a large margin.  This may hurt its overall appeal in the future.  That being said, it is obviously a great company with a strong balance sheet and an attractive dividend.  People looking for low-risk, income-producing equities could do a lot worse than Shaw Communications (SJR/B).

 

 

SJR/B Canadian Dividend Stock Graph

TSE SJR/B

SJR/B Canadian Dividend Stock Metrics

TickerNamePriceDividend YieldPayout RatioDEBT_TO_MKT_CAPDividend Growth 5 yearsDividend Growth 1 years
SJR/BShaw Communications Inc204.669.850.420384832.249274.705787

 

Rogers Communications Inc (RCI/B)

 

Canadian telecom companies always look enticing to Canadian buyers looking to soak up a juicy dividend.  Rogers Communications (RCI/B) is Canada’s biggest wireless services provider.  When you combine that with the fact that it is also the biggest cable television provider you have the makings of a very powerful company indeed.  Its revenues break down as follows: 66% from wireless communications, 30% from cable, 3% from new media properties, and 1% from its business solutions division.  In the first quarter of 2011 Rogers raised its dividend 11% to 3.73.  This caps off a strong 5 year run that has seen the company grow its dividend from an initial .16 per share in 2006.

 

Rogers CommunicationUpcoming Opportunities and Dangers:

Rogers has provided its shareholders with a steady dividend, has a very solid balance sheet, and a decent P/E ratio.  There is no question that the biggest news in the telecom sector these days is increased international competition.  Will Rogers respond to the challenge by streamlining their operations and coming out stronger or will the competition eat into its market share and force the company to downsize and specialize in order to remain viable?

Because the telecom depends so heavily on the part of the industry (wireless communications) that is growing the fastest, some experts believe it is the best stock to buy when considering the four major Canadian players (BCE Inc. (BCE), Telus Corp (T), and Shaw Communications (SJR/B) being the main competitors).  Other experts argue that because wireless communications have quickly become the most competitive part of telecommunications, the downward price pressure will hurt Rogers (RCI/B) the most.  Recent news on the Canadian federal government allowing for increased foreign ownership of Canadian telecoms, and deregulation of wireless communications in general, mean that this competition could be a very real risk going forward for Rogers.  It is likely the biggest wildcard out of the four major telecoms.

In preparation for the upcoming battle for market share in the wireless sector Rogers has heavily invested in cutting-edge infrastructure to support faster networks.  The technology is known as Long Term Evolution (LTE), and has been cited as the solution for large scale video streaming and other dense downloading traffic.  Rogers Communications (RCI/B) is well ahead of its rivals (and obviously even further ahead of new companies wanting to get into the market) in the application of this new technology and the Globe and Mail recently quoted Rogers CEO Nadir Mohamed as saying, “We’re putting a stake in the ground – LTE is going to the gold standard going forward, that’s where the world is going.”  He went on to say that the LTE service will be availe in Toronto, Montreal, Vancouver, and Ottawa by the end of 2011, and in Canada’s 25 biggest markets by 2012.  They claim that the LTE network will be three to four times faster than existing high-speed mobile networks.  By comparison Telus has stated it will begin launching the service in 2012, and BCE has begin running test trials, but has not announced any long term plans.  Verizon and AT&T have begun deploying the technology already in the USA.

Investors should keep in mind that it Rogers Communications (RCI/B) is a mature company with little room for explosive growth, but it should give shareholders looking for steady dividend income exactly what they want.  They have a sustained a solid record of raising the dividend aggressively and that trend has continued this spring.  Personally, I would rather park my money somewhere else within the sector; however, the commitment Rogers has shown to protecting its place at the top of the wireless food chain and expanding into other areas does bode well for the future of the company.

 

Rogers RCI/B Canadian Dividend Stock Graph

TSE RCI/B

Rogers RCI/B Canadian Dividend Stock Metrics

TickerNamePriceDividend YieldPayout RatioDEBT_TO_MKT_CAPDividend Growth 5 yearsDividend Growth 1 years
RCI/BRogers Communications Inc35.823.9648.30.455636273.93565-18.44262

 

BCE Inc. (BCE)


 

BCE Inc. (BCE) is the largest communications company in Canada.  It has substantial market share in wireless, landline phones, high-speed Internet, and satellite TV.  The company has recently acquired CTV which was formerly the largest privately owned television company in Canada for 1.3 billion dollars.  This acquisition included major subsidiaries such as TSN.  Just to prove how broad their interests are, BCE also owns 15% of Canada’s biggest newspaper the Globe and Mail and a 45% stake in the Bell Aliant Regional Communications Income Fund.  The company announced during the first quarter that they would be raising their already substantial dividend 5% and that their revenues had increased 9% over the first quarter of 2010.  Although BCE Inc. (BCE) faces major competition from the other 3 big dogs in the Canadian telecom game (Shaw Communications (SJR/B), Rogers Communications RCI/B), and Telus Corporation (T) they are the unquestioned overall leader in the industry and are very well diversified.


Bell smartphonesUpcoming Opportunities and Dangers:

 

We are just beginning to see how this new media conglomerate will look after BCE completed their massive wholesale purchase of CTV and its speciality channels in September of 2010.  All indications are that it was a great purchase.  The quick retaliatory moves by BCE’s major competitors seen Shaw Communications purchase the Canwest Global network, and Rogers Communications purchase City-TV.  If this is any sort of measuring stick or indication of the relative power of the three companies then clearly BCE Inc. (BCE) has a sizeable advantage as CTV’s presence dwarfs the other two.

 

When sizing up BCE as a potential stock purchase I was immediately drawn to the clear and concise mission statement that has been reiterated in recent press releases.  The message is, “Bell is focused on achieving a clear goals – to be recognized by customers as Canada’s leading communications company – through the execution of 5 Strategic Imperatives: Improve Customs Service, Accelerate Wireless, Leverage Wireline Momentum, Invest in Broadband Networks and Services, and Achieve a Competitive Cost Structure.”  These clear goals stand in stark contrast to BCE’s competitors who appear to have less defined objectives.

 

The first quarter dividend raise is the sixth such raise since the fourth quarter of 2008.  Overall this represents a 42% increase.  Notably the company has a much longer track record of dividend payment (62 years) than its main competition.  When initially comparing charts of the “Big Four” telecoms in Canada, BCE tends to look the least attractive due to its relatively flat trajectory compared to the other three companies who have seen much more recent growth.  We are now facing 3 growing competitor against a time-tested business structure in place at BCE Inc. (BCE) that has allowed them to navigate increasing competition for decades and still stay on top.

 

I personally appreciate BCE as a steady dividend-paying buy.  One look at the graphs will tell you that BCE Inc. (BCE) likely will not blow you away with growth opportunities in the coming years, but neither will the other Canadian telecoms according to most industry analysts.  BCE enjoys absolutely a massive infrastructure advantage which gives them a retail edge over new arrivals on the telecom scene because it enables them to piggyback on existing networks as they build their brand.  Their diversity allows them to withstand new challenges or changes in any specific sector of their telecommunications empire, and that characteristic, as well as their clear game plan and extremely attractive dividend, make them a good choice out of the Canadian telecoms in my opinion.

 

BCE Canadian Dividend Stock Graph

TSE BCE

BCE Canadian Dividend Stock Metrics

TickerNamePriceDividend YieldPayout RatioDEBT_TO_MKT_CAPDividend Growth 5 yearsDividend Growth 1 years
BCEBCE Inc37.875.4762.450.44799485.01490213.03681

 

Canadian Dividend Stocks in Telecom

 

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!

 

BlackBerryHistorically, 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:

Bell Canada Enterprises (BCE)

Rogers Communications (RCI/B)

Telus Coporartion (T)

Shaw Communications (SJR/B)

 

 

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