In today’s environment of low interest rates and a questionable economy, there are a number of industries that are poised to benefit. One that stands out is the telecommunications industry. Telecoms are faced with high capital expenditures (capex), and in the wake of 5G, it is anticipated that capex will jump over the next few years. Low interest rates mean lower interest costs, and as such, that will make rolling out 5G less expensive.
They are also defensive stocks that are less sensitive to market fluctuations. In other words, they tend to outperform in the event of a market crash.
Dividend stocks also tend to outperform in this type of environment. Income seekers disregard guaranteed income products, as the rates are too low. As such, they turn to the safety of dividend stocks. In Canada, two of the most reliable (and largest) telecoms are Telus (TSX:T)(NYSE:TU) and BCE (TSX:BCE)(NYSE:BCE). Which is the better buy today? Let’s take a look.
In the past year, it has been a no contest — BCE has clobbered Telus in terms of stock appreciation. Year to date, BCE’s stock price has shot up 20.6%, while Telus has lagged, eking out a 5.5% gain. Looking further out, although the gap narrows, BCE is still trouncing Telus’s performance.
Over the past five years, BCE has averaged approximately 10% annual returns, whereas Telus as only averaged returns of 5% annually. The difference is quite significant and will most likely be a surprise to most investors.
Edge: No doubt, BCE has been the more reliable stock in terms of historical performance.
As mentioned, a key attribute of telecoms is the dividend. As of writing, both companies offer investors an attractive starting yield. Bell currently offers investors a 4.90% yield, while Telus is currently yielding 4.73%.
From a dividend-growth standpoint, both are Canadian Dividend Aristocrats. It is here, however, where Telus distinguishes itself. Telus has a 15-year dividend-growth streak (vs. 10 for BCE), and it has averaged 9% dividend growth over the past five years. It has a payout ratio around 75% and expects to raise dividends by 7-10% annually through 2022.
For its part, BCE has raised dividends by only 5% on average, and the dividend accounts for 94% of earnings.
Edge: Telus is the winner, as its dividend is more sustainable and ensures higher growth in the future.
At first glance, neither is particularly cheap. Telus is trading at 2.73 times book value and has a price-to-earnings (P/E) to growth ratio of 3.49. Telus does, however, trade at a respectable 16.42 times earnings, which is below its five-year historical average of 18.94. The problem is that its growth rates are expected to slow.
Analysts expect 4.69% earnings growth over the next five years. As such, it is not surprising to see its P/E drop, as it averaged high single-digit growth previously.
Thanks to its outperformance in 2019, BCE stock is more expensive than usual. It has a price-to book ratio of 3.63, a P/E of 20.02 and a P/E-to-growth ratio of 4.98, all of which are above the company’s historical averages and are among the tops in the industry, including those south of the border.
Edge: At today’s valuation, Telus has the edge. BCE is only expected to grow earnings by 3.67% over the next five years and, as such, does not deserve such a premium valuation over the competition. Both have limited upside, but Telus has less downside potential.
It was a hard-fought battle, but Telus has edged out its rival. True, BCE has outperformed Telus recently. However, investors must remember that it’s not about what the stocks have done for you lately, but what they will you do for you in the future. This is where Telus has a clear edge. The dividend is better supported, has higher expected growth rates, and is better valued at today’s prices.
For income investors, you will receive more than double the rate of inflation. Although neither company will return outsized gains, they make excellent bond proxies and are excellent defensive positions.
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 Mat Litalien owns shares of TELUS CORPORATION.