It’s been a great time to own some of Canada’s telecom companies as a turn to a more defensive mindset in the market have lifted share prices over the past year. That bodes well for current shareholders, but portfolio manager David Driscoll says it doesn’t mean you should be loading up on names like BCE (BCE Stock Quote, Charts, News, Analysts, Financials TSX:BCE), Rogers Communications (Rogers Stock Quote, Charts, News, Analysts, Financials TSX:RCI.B) and Telus (Telus Stock Quote, Charts, News, Analysts, Financials TSX:T), since the growth prospects for the lot appear minimal going forward.
“The telcos are happy place to go hide if you don’t want to be in the bond market. Their dividend yields are higher than five- and ten-year Canadian bonds right now,” said Driscoll, president and CEO of Liberty International Investment Management, speaking on BNN Bloomberg on Friday.
“That’s the good side of the of the telcos. The bad side is there’s no growth. And despite the fact that we’ve moved to wireless and 5G it’s still the costs that are causing them to not see the kind of growth that they enjoyed a decade or so ago,” he said.
“So, I’d be cautious on owning them. Again, it’s just like the banks — you want to own one but not all of them and just sit back and get the dividend growth,” Driscoll said.
Telus, BCE and Rogers all have substantial dividend yields, currently at 4.3 per cent for Telus, 5.4 per cent for BCE and 3.1 per cent for Rogers. Their share prices have mostly lifted over the past year as well, with Telus up about 14 per cent over that period, BCE up a big 22 per cent and Rogers up ten per cent.
“Telus has been raising its dividends at a faster rate than the others and it’s what we own in our client’s Tax Free Savings accounts,” Driscoll said. “Their share price has been pretty much trading up around its high. And as a result, it’s been providing some safe harbour during these times, shall we say.”
Telus has received praise for its diversification strategy. Where BCE and Rogers have kept up their media holdings as a play beyond their main telecommunications business, Telus has gone the tech route, developing solid businesses in IT, in customer experience offshoot TELUS International (TELUS International Stock Quote, Charts, News, Analysts, Financials TSX:TIXT) and digital health tech company TELUS Health.
On the latter, Driscoll said while Telus Health might one day be a difference maker for the company, that day has yet to come. Telus’ latest reported quarter, the company’s Q3 2021, delivered in November, saw overall revenue rise by seven per cent to $4.251 billion, with TELUS Health representing $131 million (up 12 per cent from a year earlier) of that amount.
“[TELUS Health] is not a large enough percentage revenue generator for the company, but if they play their cards right and it becomes more of an impact on revenues then it could give them some free cash flow over and above what they’re having to spend on on 5G,” Driscoll said.
“The problem with 5G is that they’ve had to pay so much for all of this spectrum. So, how are they going to recoup their costs? It’s not like their customers are going to want to see a doubling of their phone packages because then there’ll be an outright revolt. So they have to find other ways of continuing to keep their revenues growing when right now revenue growth is probably in the zero to two per cent range, which is even less than what GDP growth is. So, slow growth, you get income but don’t anticipate a lot of capital appreciation,” he said.
Ahead of Telus’ fourth quarter results due on February 10, the company will be in tough to repeat the success of the company’s third quarter which saw record quarterly customer additions. Telus added 135,000 net new mobile phone connections, 110,000 device connections and a total of 320,000 mobile and fixed line customer additions, an increase of 43,000 from a year earlier.
“Our team once again achieved strong operational and financial results in the third quarter,” said Darren Entwistle, President and CEO, in a November 5 press release. “TELUS’ continued execution excellence was again characterized by the consistent combination of industry-leading and profitable customer growth, resulting in strong financial results across our business as evidenced by consolidated revenue and EBITDA both increasing seven per cent.”
Driscoll said the Canadian telecom companies have a place within an investor’s portfolio but they need to be balanced with more growth-oriented stocks, even in more defensively-minded periods such as the current one.
“It’s nice to have about 50 per cent [of your portfolio] in big blue chips where you’re getting most of the profits paid out in the form of a dividend for income, but you still have to have the other side of your portfolio in small and mid-cap stocks where a lot of their profits are going back into the business for capital appreciation because it’s the growth in the dividend and the growth in the stock price that helps offset inflation given our time right now,” Driscoll said.