Better Buy: BCE Stock or TELUS Stock?

BCE stock and TELUS stock are both blue-chip stocks for dividend income. One is a slightly better buy. Here’s why!

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It makes good sense to compare and contrast among industry peers to determine which may be the best investment, as they’re typically exposed to same industry challenges. This is why we often see stocks in the same industry moving in tandem. This is the case for big Canadian telecom stocks BCE (TSX:BCE) and TELUS (TSX:T).

BCE Chart

BCE and TELUS data by YCharts

Above shows the 10-year price action of the stocks moving in tandem. Which is a better buy today? Read on for a quick comparison!

Dividend fun facts

Based only on the dividend yield, BCE beats TELUS. At writing, BCE stock offers a dividend yield of 6.44%, which provides almost 24% more income than TELUS stock’s yield of 5.20%. So, BCE attracts investors seeking current income.

Furthermore, the dividend stocks are Canadian Dividend Aristocrats that have a track record of paying increasing dividends. BCE stock has hiked its dividend for 14 consecutive years with a five-year dividend-growth rate of 5.1%. TELUS stock has raised its dividend for 19 consecutive years. In the last five years, its dividend increased at a compound annual growth rate of 6.6%.

As a smaller player, TELUS has offered higher dividend growth than BCE over the last 20 years. This trend will likely continue.

BCE’s trailing 12-month (TTM) payout ratio was 127% of earnings and 107% of free cash flow. In comparison, TELUS’s TTM payout ratio was 74% of earnings and 102% of free cash flow.

Financial position

The Canadian telecoms are capital intensive. From 2019 to 2022, 63% of BCE’s operating cash flow went into capital investments. TELUS’s capital spending in the period was even more extravagant — using 89% of operating cash flow.

Although BCE has a higher credit rating of BBB+ than the BBB rating for TELUS, it’s a little scary to see BCE having accumulated losses of $3.6 billion at the end of 2022. On the contrary, TELUS’s retained earnings of $4.1 billion provide better peace of mind.

This is not to say that BCE’s dividend is in immediate danger because between its free cash flow and current assets, it should have sufficient liquidity to protect its dividend. Otherwise, BCE wouldn’t have raised its dividend by 5.2% last month. I’ll have you know that its 5% dividend-growth rate has been very consistent over the last decade.

Valuation

At $60.13 per share at writing, BCE stock trades at a discount of 8% according to the analyst consensus 12-month price target. Essentially, then, the stock is fairly valued. At $26.99 per share, analysts believe TELUS stock is undervalued by 14%.

Investor takeaway

Both stocks have poor price momentum currently. Their technical charts are unappealing. That said, both stocks could still attract value investors. Particularly, blue-chip BCE offers a higher yield of 6.4% for investors who need greater current income.

TELUS stock offers slightly better margin of safety from a valuation perspective. As well, it should continue to provide higher dividend growth. Because of this, I think TELUS is a better buy. And long-term investors should look for an entry point in TELUS.

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 Kay Ng has positions in TELUS. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.

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