Telus is a good defensive play for 2020, this fund manager says

Interest rates have been holding steady over the past couple of quarters, as the Bank of Canada and central banks worldwide see little need in rocking the boat on the new ultra-low rate environment. The US Federal Reserve cut its rate three times in 2019 while indicating little change in its approach over the near-to-medium term. Canada acted similarly by choosing to hold its key interest rate of 1.75 per cent both in October and then again in early December.

Time was that signs of a strong economy such as increasing consumer spending and low unemployment would see central banks raising interest rates to counter inflation and prevent an economic slowdown. That playbook has been shelved, however, in favour of a concerted effort to bolster confidence by keeping rates low and responding to global risks like the ongoing trade wars between the US and China.

All that is to say the utilities such as the Canadian telcos — which typically do better in lower interest rate environments — have been in fine shape of late. BCE finished 2019 up 11.6 per cent while Telus was up 11 per cent. Rogers Communications was the outlier, ending 2019 down 7.8 per cent.

Telus is expected to see profit grow over 2020, which bodes well for positive returns on the stock, said Campbell, chairman of Campbell, Lee & Ross, who spoke to BNN Bloomberg on Friday.

“Telus, like BCE and Rogers, when we had the interest rate outlook change in the fall, the stocks bounced back again,” Campbell noted.

“Of the three, we own BCE. But Telus is fine here,” he said. “Probably expect a market return of four or five per cent plus the dividend or maybe only three because that’s about how much earnings will grow.”

“But it’s a safe place to hide and it should be a positive return,” Campbell said.

One of the bigger stories concerning the telcos in 2019 was the move first initiated by Rogers and quickly followed by BCE and Telus to waive overage fees for wireless customers and instead offer unlimited data plans. The aim was to attract more customers to newer plans even as companies would thereby be foregoing gains made on overage fees.

For Rogers, customers were quick to migrate to the new plans, resulting in management guiding for lower revenue going forward. Both BCE and Telus seem to have taken a more measured approach, as witnessed by Telus’ latest quarter where the company saw 111,000 net mobile phone additions, down from 121,000 over the previous quarter but a better result than analysts had been expecting.

“The year-over-year decline was largely due to Telus purposely choosing to remain on the sidelines for some of the more aggressive and uneconomic competitive activity that occurred in the quarter,” said Telus CEO Darren Entwistle in the company’s third quarter conference call on December 7.