Who Will Win Over the Next 5 Years: Telus, BCE or Rogers?

All three performed well over the past five years, but who is best positioned for the future?

The Motley Fool

The Canadian telecommunications market has three main players, BCE Inc. (TSX:BCE)(NYSE:BCE), Telus (TSX:T)(NYSE:TU) and Rogers Communications (TSX:RCI.B)(NYSE:RCI). They operate as a virtual oligopoly with the profit objective seemingly at least as important as market share.

Over the past five years, the clear winner was Telus with a total investment return of 197%, followed by BCE (150%) and Rogers(72%). The first two stocks also managed to beat the broad market index by a considerable margin.

The question now is who will win the race the race over the next five years? We consider a number of possible parameters in order to make a selection.

Why did Telus and BCE leave Rogers behind?

This is not a simple question to answer. On the face of it, all three performed well over the past five years with comparable earnings and dividend per share growth.

However, Telus led the pack in terms of gross profit growth, mobile subscriber acquisition, average revenue per mobile user, free cash flow generation and customer satisfaction. BCE generated strong profit margins but the business performance was held back by the large but declining landline division.

Rogers did not fare badly but the important trends for new mobile subscriber acquisition and average revenue per subscriber started to deteriorate as far back as the third quarter of 2010. With the largest mobile subscriber base, it observed competitors starting to erode its highly profitable business.

The business strategies are different…

Rogers and Bell have recently taken ownership of significant in-house broadcasting assets that can produce content across all technologies. Telus could find itself at a competitive disadvantage if it continues to refrain from acquiring media content. However, given the relative modest profits generated from these assets, the Telus strategy may eventually turn out to be the prudent approach.

A new CEO for Rogers

Recent experience at Canadian Pacific Railways (TSX:CP)(NYSE:CP) again demonstrated the huge influence that a new CEO can have on the performance of a business. Only time will tell whether Mr Guy Lawrence (formerly of Vodafone UK), who joined Rogers in December 2013, will have a similar influence.

The Telus executive team is well entrenched under the leadership of Mr Darren Entwistle, who took over in July 2000, and the BCE team is settled under CEO Mr George Cope.

A strong balance sheet is required

In the telecommunication sector, scale and network infrastructure play an important role. It is therefore paramount for these companies not only to be able to afford the operating licences but also to be able to exploit the license fully. Neither of these can be done without a considerable balance sheet.

Rogers currently has the most leveraged balance sheet and with the recent $3.3 billion acquisition of 700 MHz spectrum, the already high debt levels will balloon. Should interest rates continue to rise, its current low cost of finance will increase considerably.

Both Telus and BCE have more moderately leverage balance sheets and the acquisition cost of additional 700 MHz spectrum was also considerably lower at $800 million and $500 million respectively.

Dividends will remain important

These are mature companies that generate significant free cash flow and have excellent track records of growing dividend payments over time. Barring serious business problems, this pattern should continue contributing strongly to the total investment return.

I rate BCE number one in this regard with a higher starting yield followed by Telus but am concerned that the high debt levels in Rogers may eventually impact their ability to grow dividends.

Foolish bottom line

All three the telecommunications markets leaders in Canada are highly profitable businesses. However, given the strong management team, superior balance sheet, prudent capital allocation, reasonable valuation and positive growth momentum, I consider Telus as the favourite to win the race again over the next five years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Deon Vernooy holds positions in BCE Inc and Telus.

More on Investing

grow money, wealth build
Dividend Stocks

3 Stocks That Will Make You Richer in 2024

When it comes to creating riches in 2024, these companies offer the best, most solid chance while providing dividends while…

Read more »

oil and gas pipeline
Dividend Stocks

Is it Too Late to Buy TC Energy Stock?

TC Energy is up 17% in recent months. Are more gains on the way?

Read more »

dividends grow over time
Dividend Stocks

If You Invested $1,000 in goeasy Stock in 2014, This Is How Much You Would Have Today

When it comes to growth, it's hard to beat goeasy (TSX:GSY) stock. But what should investors consider for future growth,…

Read more »

Utility, wind power
Energy Stocks

Brookfield Renewable Partners Stock: Buy, Sell, or Hold?

BEP stock (TSX:BEP.UN) now trades at half its share price back in 2021. So what should investors do with this…

Read more »

Supermarket aisle with empty green shopping cart
Stocks for Beginners

3 Retail Stocks to Buy Hand Over Fist in February

These retail stocks offer huge growth for those getting in now and holding long term, especially after earnings demonstrate their…

Read more »

Value for money
Dividend Stocks

Better Buy in February 2024: Magna Stock vs. BCE Stock

Both Magna stock (TSX:MG) and BCE stock (TSX:BCE) have faced troublesome stock prices of late, but which is offering value?

Read more »

Growing plant shoots on coins
Dividend Stocks

3 No-Brainer Dividend Stocks to Buy With $1,000 Right Now

These three dividend stocks look like an excellent addition to your portfolio.

Read more »

Technology
Energy Stocks

2 No-Brainer Energy Stocks to Buy With $5000 Right Now

Cenovus Energy is one of two high quality energy stocks that are undervalued and well-positioned for long-term success.

Read more »