Here’s My Favourite Telecom Stock for 2023

Large Canadian telecom stocks won’t give you the highest returns, but they can provide stable dividends and steady long-term returns.

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TELECOM TOWERS

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Investors buy and hold the big Canadian telecom stocks for their stability. Their dividend income also contributes a good portion of their returns. From this perspective, we would choose either BCE (TSX:BCE) or TELUS (TSX:T) as our favourite telecom stock. Let’s explore whether this is a good investment strategy today.

Past returns: Who was the winner?

Unlike Rogers Communications (TSX:RCI.B), both BCE and TELUS have regularly increased their dividends in the last 14 years or longer. As a result, BCE and TELUS were able to deliver higher returns from their dividend payouts alone. In the last 10 years or so, it’s, therefore, not surprising that the dividend stocks delivered higher total returns than Rogers Communications. Specifically, BCE stock’s compound annual growth rate (CAGR) was about 9.1%, TELUS’s was approximately 9.7%, while Rogers’s was 6.9%.

Between BCE and TELUS, though, the former delivered slightly better risk-adjusted returns as noted with a higher Sharpe ratio of 0.73 versus TELUS’s ratio of 0.67 in the period. BCE stock has also been more resilient during corrections.” BCE stock has also been more resilient during corrections.

So, risk-averse investors will probably prefer BCE over TELUS, especially when the former offers greater regular returns with a juicier dividend.

Dividends

At writing, BCE yields 6.4%, which provides 22% greater income than TELUS’s yield of 5.2% and double Rogers Communications’s yield of 3.2%. Although we’re in a disinflationary environment, inflation still remains relatively high versus, say, the five-year average. Specifically, the latest inflation rate in Canada was 5.2% in February. Therefore, it’s important to many investors to get a good yield on their investments to combat inflation. BCE has no competition in terms of providing the biggest yield.

What about its dividend safety? BCE has increased its dividend for 14 consecutive years. Its 10-year dividend growth rate is 5.2%, which aligns exactly with its last dividend hike of 5.2% in February. However, its payout ratio is currently overextended. Its trailing-12-month (TTM) payout ratio is 107% of free cash flow and 127% of net income. However, many analysts don’t believe BCE will cut its dividend with the expectation of the tone down of capital spending.

TELUS has increased its dividend for 19 consecutive years. T stock’s 10-year dividend growth rate is 8.3%. It tends to increase its dividend semi-annually. He telco’s recent annualized dividend increase was 6.7%, which aligns with its five-year dividend growth rate of 6.6%. Its TTM payout ratio is 102% of free cash flow and 74% of net income. Similar to BCE, lower capital spending should lead to better coverage of TELUS’s dividend through greater free cash flow generation. Additionally, TELUS also has $4.1 billion of retained earnings that can serve as a buffer for just over three years of dividends. So, TELUS’s dividend seems a tad safer.

Technically

The technical charts of BCE and TELUS are not encouraging, as the stocks are in a downward trend. However, BCE’s chart looks a bit more positive than TELUS’s. Perhaps, it’s because BCE stock gets support from income investors whenever its dividend yield is “too high”.

Whether to pick BCE or TELUS as your favourite telecom for income depends on your preference for more income or greater income safety. That said, BCE’s S&P credit rating of BBB+ is a notch higher than TELUS’s BBB, although both are investment grade. TELUS is also expected to deliver almost triple BCE’s earnings-per-share growth rate over the next three-to-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 Kay Ng has positions in TELUS. The Motley Fool recommends Rogers Communications and TELUS. The Motley Fool has a disclosure policy.

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