They may be underperforming compared to other sectors during COVID-19 but that’s no reason to forget about the Canadian telcos, says portfolio manager John Zechner, who likes Telus (Telus Stock Quote, Chart, News TSX:T) from here.
“I'd stick with the telecoms,” says Zechner, lead equity manager at J. Zechner Associates, speaking on BNN Bloomberg on Monday. “You're getting a decent yield, you're getting some growth — quite honestly, I've got all the names right across the board: BCE, Rogers, Telus and Shaw.”
Telus’s share price was doing just fine before the COVID-inspired market pullback hit in late February. The stock had climbed 21 per cent between late October and mid-February to reach an all-time high of $27.74 before the bottom fell out and Telus briefly dropped below $20.00.
And while Telus, BCE and Rogers have all climbed out of their respective holes to some extent, their recoveries have lagged the streaking growth names in tech and other sectors, where share prices have gone into positive territory for the year.
The juxtaposition is a strange one, since defensive names such as Telus would theoretically be where the money would head during times of uncertainty such as today’s.
But it’s clear that the market continues to favour the Apples and Amazons over telcos like Telus and BCE, where Telus, with its generous 5.1-per-cent dividend yield, is now down nine per cent for the year.
Zechner says it’s a mistake to ignore the telcos right now.
“I just think the infrastructure telecom assets are undervalued in Canada,” Zechner said. “You’ve got the growth because of streaming and all the other activities, what we're seeing on cloud business growth and these guys are all bundling their activities with wireless on top of it.”
“These are decent valuation, too, with 6x-7x operating cash flow and a yield on top of that,” he said. “[Just buy and] put those away. They've actually underperformed lately while people chase the high fliers and some of the cyclical recovery stocks, but I think I’d stick with telecom right now.”
Telus saw its net income fall by 19 per cent year-over-year to $353 million in its most recent quarter, its fiscal first quarter delivered in early May, on revenues of $3.7 billion, up 5.4 per cent year-over-year.
“Our robust and consistent performance over the longer-term, coupled with our strong financial position, positions us well to navigate the uncertainty caused by the global COVID-19 pandemic, as well as for anticipated post-pandemic economic challenges and market opportunities,” said CEO Darren Entwistle in the quarterly press release.
Telus’s operations have been for the most part undisturbed by COVID-19, with telecom services having been deemed essential. The company reported in May that over 95 per cent of the company’s domestic employees were transitioned to work-from-home with staff at some closed stores redeployed in other areas.
Last month, Telus launched its 5G network service in five of Canada’s larger metropolitan areas, with the company expecting to expand to 31 markets by the end of the year.