Stock Market: Are Telecoms Bargains or Value Traps?

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, Telus, and Rogers 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 BCE shares (BCE-T) 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 (T-T) story is similar. In March 2019, shares were trading at $24.73, compared to $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 $0.95, well below the dividend payment. 

Shares in Rogers Communications (RCI.B-T) could be purchased for $71.87 five years ago. Rogers was paying a quarterly dividend of $0.50 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 later 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. 

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 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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