Income investors and retirees love telecom stocks — not just because they have high yields, but because they’re stable and offer a fair amount of long-term capital gains. The Big Three Canadian telecoms have enjoyed rock-bottom interest rates for many years now, which has been a huge positive. Competition has also been pretty minimal compared to our neighbours south of the border — another huge positive.
Because of these two factors, telecom stocks have been extremely rewarding to long-term shareholders, as they’ve offered solid stock price appreciation, dividend growth, and stability, but going forward, things may get a bit rockier as competition picks up from serious new entrants, as new regulations are put forth by the CRTC, and as interest rates continue their upward trajectory.
The Big Three telecoms have been fantastic investments, and they will continue to be, but I believe there’s a perfect storm forming that may potentially cause a major slowdown.
Freedom Mobile, the wireless carrier of Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR) has been investing heavily in its wireless infrastructure, and it appears that it’s going to steal a huge amount of subscribers from the Big Three incumbents over the next few years.
Telus Corporation (TSX:T)(NYSE:TU), BCE Inc. (TSX:BCE)(NYSE:BCE), and Roger Communication Inc. (TSX:RCI.B)(NYSE:RCI) are going to experience the entrance of a fourth major player, which is out of the ordinary since these Big Three telecoms have had an oligopoly for quite some time.
Rising interest rates at a time of rising competition
The entrance of Freedom Mobile into the Canadian telecom scene will cause immense pricing pressure and force the Big Three incumbents to undertake aggressive network upgrades to retain its subscriber bases. That means less long-term profitability and upped capital expenditures — all at a time when interest rates are heading up.
What does that mean for the Big Three? A slowdown in share appreciation and long-term dividend growth may be in the cards, and it appears that shares of BCE and Telus have already taken into consideration the impact of rising interest rates, rising competition, or both. Rogers Communications continues to be on the upward trajectory thanks to its top-notch subscriber growth momentum, but this could soon come to a halt once Freedom Mobile increases its phone selection, finishes its latest LTE roll-out, and ramps up its promotions and marketing initiatives.
Bottom line
Interest rates are not good news for the Big Three incumbents, and I believe the issue will be exacerbated by the increase in competition caused by Freedom Mobile over the next few years.
The wireless subscriber bases of the Big Three telecoms have been experiencing growth of late, but I believe they’ll be vulnerable as Freedom Mobile continues to become a more attractive option for the average Canadian wireless consumer. Because of this, I think Shaw Communications is the best bet right now. Freedom Mobile is a real threat, and although it’s off to a slow start in terms of subscriber growth, I believe the company will eventually experience a massive surge in subscribers at the expense of the Big Three incumbents sometime over the next few years.
Shaw Communications has the opportunity to really disrupt an industry, and I believe it will be successful over the course of the next five years as it entices Canadians with the perfect balance between reliability and affordability. For that reason, I believe Shaw is the best telecom bet right now, as it’s best positioned to deliver superior dividend growth and capital gains over the next five years and beyond as interest rates move upward.
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