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Better Buy: Telus (TSX:T) or Rogers Communications (TSX:RCI.B)?

I can think of few sectors I’d rather put my capital than the telecom industry. What a wonderful business.

Canada’s three largest telecoms virtually control the sector, although there are a few small competitors that have gained some traction in certain markets. These big players have the best networks, thousands of retail locations, and brand recognition. They’ve invested heavily in their businesses over the years, making it almost impossible to knock them off their pedestals.

Now that these companies are more mature businesses, they pay out a large percentage of their profits back to investors. This translates into impressive dividend yields today combined with solid growth of the payout over time.

Some investors just buy all three dominant players and call it a day, content with having these companies in their portfolio. But some want to do a little better, believing they can eke out better returns by picking and choosing the best telecom. They believe a smart buy today can lead to better returns tomorrow.

Let’s take a closer look at Rogers Communications (TSX:RCI.B)(NYSE:RCI) and Telus (TSX:T)(NYSE:TU), Canada’s second-largest and third-largest telecoms. Is there one stock you should prefer over the other?

Valuation

Let’s start with valuation. Is one stock considerably cheaper than the other on a price-to-earnings perspective?

Rogers earned $3.93 per share over the last 12 months, putting shares at 17.7 times earnings. The company is projected to earn $4.52 per share in 2019, putting the stock at 15.4 times forward earnings. That’s a very reasonable valuation, especially considering earnings growth of better than 10%.

Telus also trades at a decent valuation. The company earned $2.70 per share over the last year, putting the stock at 17.7 times trailing earnings. The bottom line is projected to increase to $2.95 per share in 2019, putting the stock at 16.4 times forward earnings expectations.

Rogers gets the edge here. Shares trade at a cheaper P/E, even though it’s projected to have better growth.

Business mix

On the surface, both Rogers and Telus appear to be very similar. Both offer wireless and wireline telecom services to customers. Both companies have coast-to-coast wireless divisions, while Telus’s wireline business is in western Canada and Rogers’s wireline business is in Ontario.

There’s one major difference, however. Rogers owns a smattering of television channels, radio stations, and other media assets. It also has a stake in Maple Leaf Sports and Entertainment, which owns the Toronto Maple Leafs and Raptors. Telus has no media assets whatsoever. It’s a pure-play telecom.

Ultimately, media assets come with worse operating margins than the telecom business. Rogers media assets generate about 20% operating margins, versus +40% for the wireless and wireline parts of the company. I’d much rather own these assets.

Advantage, Telus.

Dividend growth

Rogers has disappointed dividend-growth investors over the last couple of years. After being a dependable dividend grower, the company paused dividend growth over the last few years. It recently hiked its payout from $0.48 to $0.50 per share each quarter, its first increase since 2015. The current yield has suffered; it’s currently a hair below 3%.

Telus, meanwhile, has been one of Canada’s top dividend growers. The company has hiked its dividend twice per year since 2010 and has committed to doing so until 2022. It expects to increase the payout by 7-10% annually between now and 2022. Shares currently yield 4.7%.

The competition isn’t even close. Telus has delivered stellar dividend growth over most of the last decade while offering a much better payout today. Rogers is a good dividend stock but nothing close to Telus.

Which should you buy?

While Rogers does offer a better valuation today, I believe there’s a reason for that. The company is inferior to Telus when it comes to both its business mix and dividend. The market is viewing Rogers as the worse investment right now. Although I will give Rogers credit, the company looks poised to deliver nice earnings growth, and its dividend should continue marching higher.

If I was putting new capital to work in the telecom sector today, I’d add to my existing Telus position rather than buying Rogers. It’s that simple.

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Fool contributor Nelson Smith owns shares of TELUS CORPORATION.

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