The Canadian Telecoms

On 2011/09/23, in Blog, by

The Canadian Telecommunication companies such as Bell (BCE-N), Rogers (RCI-N), Telus (TU-N), and Shaw (SJR-N), are exceptional dividend paying stocks. As a U.S. investor, you can take part in four of Canada’s largest communication companies which will pay you a generous dividend yield. More importantly, you can buy these top Canadian companies without having to worry about foreign content rules, since they are all traded on the NYSE.

These are established and large cap companies, and for the most part are well managed. BCE and Shaw Communications however have accumulated more debt throughout 2010 to 2011, in large part due to acquisitions and service upgrades, among other reasons. Telus is the exception, with lower debt and a reasonable dividend payout ratio, and in my opinion the best of the Canadian telecoms to invest in.

Why Buy Canadian Telecoms?

If you aren’t investing in Canadian Telecoms, then you may want to consider them, even with their higher debt. These giant blue-chips are hybrids between technology and communication companies, and therein lay their strength and economic-moat. They are really utilities which actually own, maintain, and operate the communication infrastructure throughout Canada.

They make their money through cell-phone sales, cellular contracts, internet service providing, and basic telephone or cable services. Since these companies already have the infrastructure in place, and maintain it, the profit is in each subscriber – and a hefty profit it is. Canadians’ have learned to love but hate their telecoms, with their high fees and less than stellar customer service. But at the end of the day (like banks) people are left with little choice but to use them.

While it’s a very competitive sector, telecoms are more stable then tech only oriented companies. It really doesn’t matter whether the iphone, blackberry or android phone prevails. And it doesn’t even matter if the iPad wins over a Samsung tablet. Since the telecoms own the infrastructure, they simply provide access to wireless services, and sell end users cellular contracts with the latest phones or devices. It’s a win for telecoms regardless of what new hot product is out.

How Wide is the Moat?

The economic moat for these Canadian telecoms is extraordinary. Canadians pay some of the highest cell phone fees in the world!  Obviously that’s bad for Canadian consumers, but translates into profit for shareholders.  Many people believe the CRTC (Canadian Radio-television and Telecommunications Commission) governs the cell phone industry in Canada, but they do not. The cell phone industry in Canada is largely unregulated. As a result the big players (Telus, Bell, and Rogers) have pretty well locked down any competition and charged whatever prices they see fit.

Even with the smaller players such as Wind Mobile entering the stage, and undermining the cellular pricing market, the big three telecoms have held their ground. The reason is simple, the big three telecoms in Canada aren’t just cell-phone providers. They are diversified and well established communication companies with huge capital and resources available to undermine their competition.

How Resilient are the Telecoms?

During the recent market correction at the beginning of August, the Canadian telecoms performed remarkably well compared to other sectors. Looking at the beta of these companies, the answer becomes obvious. Any beta value below 1.0 means the company is less volatile than market index it is a part of. Therefore for most investors, a lower beta is preferable. As compared to the NYSE, Bell (BCE-N) has a beta of 0.771, Rogers (RCI-N) has a beta of 0.679, Telus (TU-N) has a beta of 0.453, and Shaw (SJR-N) has a beta of 0.597. These telecoms have a low volatility with a good dividend yield.

Bell Communications (BCE-N)

Bell (BCE Inc.) is Canada’s largest communications company, with over 30.17 billion in assets. BCE provides cellular service, both satellite and cable television, internet service, and of course phone landline services.  BCE currently trades at US $38.80 per share, has a PE Ratio of 15.11, and a debt-to-equity ratio of 101.31. The dividend yield is currently a very generous 5.4%, but the dividend payout ratio (DPR) of 80.93% is high for a big blue chip.

According to a recent Globe & Mail article, BCE has raised its quarterly dividend six times (a cumulative 41 per cent) since the fourth quarter of 2008. While most Canadians are enamoured with their biggest telecom, I have not purchased BCE because of the high DPR and high debt load, both increasing since the start of the year.  Nonetheless, BCE is a favourite among Canadian dividend investors.

Rogers Communications (RCI-N)

In second place for market cap among the Canadian telecoms, is Rogers Communications with a market capitalization of 20.73 billion. Rogers is Canada’s largest provider of wireless services, and also owns Fido (previously Microcell Communications). Rogers also provides cable TV, internet, and phone services. The company also provides broadcasting services, magazines, and sports entertainment. Rogers currently trades at US $37.93 per share, has a PE Ratio of 14.54, but with a very high debt to equity ratio of 266.01. The dividend yield is 3.80% with a dividend payout ratio of 54.78%.

Telus Communications (TU-N)

Telus Communications is Canada’s third largest telecom with a market capitalization of 15.98 billion. Like its competitors, Telus provides internet, phone, and provisions an extensive wireless service across most of Canada. It currently trades at US $49.25 per share, has a PE Ratio of 14.33, a debt-to-equity ratio of 88.94, and a dividend yield of 4.50%. The dividend payout ratio for Telus is 64.5%. In my opinion the solid DPR and lower debt, make Telus a preferable investment in Canadian telecoms, as compared to BCE and Rogers.

Shaw Communications (SJR-N)

Shaw Communications provides telephone, Internet, and television services as services primarily in British Columbia and Alberta (we use Shaw at home). Shaw has come under heavy criticism for its $69 million-dollar pension to former CEO Jim Shaw, its purchase of CanWest Global, and its family run board that leaves shareholders without voting rights.  It is one of the smaller telecoms with a market cap of 9.37 billion. It currently trades at US $21.52 per share, has a higher PE Ratio of 18.81, and a higher dividend payout ratio of 80.7%. It also has a higher debt to equity ratio of 166.7. Shaw is a monthly dividend payer, and with a yield of 4.30%, makes an interesting investment for income oriented versus growth oriented investors.


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