The Rogers-Shaw deal is sucking up all the oxygen at the moment but investors shouldn’t forget about Telus (Telus Stock Quote, Chart, News, Analysts, Financials TSX:T), which has done a good job at diversifying its assets, says portfolio manager John Zechner.
“Telus’ diversification has been interesting. It’s been different than the other telco companies,” said Zechner, chairman of J. Zechner Associates, who spoke on BNN Bloomberg on Thursday.
“All of the telcos in Canada have been generating excess cash flow and they’ve put that money into growth in other areas. BCE and Rogers to a degree did it in media assets, with Rogers and its sports franchises and things like that. Telus went a different route a little bit and went into health and into international and different provisions of services based on what they were doing on the Internet,” Zechner said.
It’ll be months before regulators make up their minds on whether to allow Rogers Communications to buy Western Canada-focused Shaw Communications in a blockbuster $26-billion merger of Canada’s third and fourth-largest telecom service providers, respectively, by market capitalization.
Critics of the proposed deal see the further shrinking of an already small pool of providers, leading to a dearth of competition and continuing high Internet and wireless rates for customers, while both Rogers and Shaw portray the merger as giving the combined entity the bulk and infrastructure to deliver better service and a better buildout of Canada’s emerging 5G network.
However it works out, the market seems to have taken a shine to the deal, with both Rogers and Shaw seeing their share prices rise substantially on the news announced on Monday, although Rogers has given up some of those gains.
Up until the deal’s announcement, Telus looked to be the clear winner over the past 12 months, with its share price up 30 per cent as compared with BCE’s gain of 11 per cent and Rogers’ gain of 15 per cent.
All the telecom stocks dropped significantly last year about this time and they took a while to recover that ground as pandemic conditions over 2020 put a damper on growth projections. Telus’ most recent quarter tells the tale, as revenue per mobile phone user fell 3.4 per cent year-over-year and roaming revenues fell as customers spent less time away from home.
Telus’ fourth quarter 2020 was delivered last month and featured revenue up 5.2 per cent year-over-year to $4.060 billion, adjusted EBITDA down 0.2 per cent to $1.409 billion and EPS of $0.20 per share compared to $0.30 per share a year ago. Analysts had been calling for revenue of $4.03 billion and earnings of $0.25 per share.
At the same time, the company managed strong customer growth with 253,000 net additions including 78,000 net adds in wireline and 175,000 net wireless additions, up from 158,000 a year earlier.
For the 2020 year, Telus hit revenue of $15.463 billion and adjusted EBITDA of $5.701 billion, with management now guiding for 2021 targets of eight- to ten-per cent revenue growth and six- to eight-per cent earnings growth.
Telus said COVID-19 is likely to have “significant impact” on its business over the first half of 2021, particularly related to travel advisories and border restrictions taking its toll on business and consumer travel and thus on the company’s roaming revenues.
CEO Darren Entwhistle said in the Q4 press release the company has confidence in delivering to its 2021 targets.
“This includes expected industry- leading revenue and EBITDA growth of up to 10 and 8 per cent respectively, alongside free cash flow of approximately $1.5 billion,” Entwhistle wrote. “Furthermore, the unparalleled skill, innovation and grit of our team underpins our leading multi-year dividend growth program, now in its eleventh year. Notably, we have returned over $19 billion to shareholders since 2004 through our dividend and share purchase programs, representing $15 per share.”
For Zechner’s part, while he’s bullish on the sector as a whole, Telus’ share price rise might make it a little less attractive by comparison.
“I like Telus in here. In all honesty, though, of the major players I probably would pick it behind Shaw, Rogers and BCE just because the valuation is higher,” Zechner said.
“I like Telus’ story. They spun off the international side but when you add it all up their valuation now is a little bit higher than the rest of the group,” he said.
“I like a blanket approach in the sector and I own all of the names,” Zechner said. “We own Telus, we own BCE, we own Roger and we still own Shaw despite the takeover and we own even Quebecor in there.”
“I think this is an under-appreciated, cheap sector with some growth going forward and all the names stick out as being good value in here,” he said.