At a time when many energy stocks are slashing dividends or slowing dividend growth, two telecom stocks are maintaining their dividend momentum. BCE (TSX:BCE) and Telus Corporation (TSX:T) have maintained strong dividend growth throughout 2020-2022, despite accelerating their capital spending to build 5G infrastructure. BCE continued to grow dividends by 5% and Telus by 5%-7% even when their profits fell due to rising depreciation.
Why did these telecom stocks continue growing dividends?
Generally, a company slows or pauses dividend growth when its profits and cash flows fall. But BCE and Telus continued growing dividends because the dip in profits and cash flows was temporary. They earned stable cash flows and channelized them into building 5G infrastructure.
A generational upgrade brings long-term cash flows as it creates an ecosystem for new technologies. The 4G upgrade in 2010 set the stage for cloud computing, video calling, and live streaming. The 4G network helped Telus grow dividends by more than 10% annually from 2011 to 2015. Even BCE grew its dividend by 14.6% in 2011 and 8.6% in 2012 before normalizing the growth to 5%.
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The 5G opportunity is bigger than 4G in many ways. The fifth-generation ecosystem will set the stage for artificial intelligence (AI) at the edge. AI started gaining roots with ChatGPT and Nvidia data centre graphic processing units. Making AI perform tasks like security cameras, road traffic management, autonomous driving, and drone deliveries requires Wi-Fi-like internet connectivity with low lag time. And 5G provides just that.
These two telecom stocks are dialling up impressive future profits
If you look at BCE and Telus’ current income statements, their profits declined, and leverage and interest expenses increased. Telus’ dividend payout ratio was 89% in the first quarter, way above the guided range of 60-75% of free cash flow because of one-off capital spending on PureFibre infrastructure and the 5G network roll-out.
Do not base your decisions on these one-off events. Look at the revenue growth, as that will bring regular future cash flows. The company will have enough cash to repay debt and rebuild cash reserve.
As for profits, two reasons for the profit dip were depreciation and interest rate expense. Depreciation is a non-cash expense. It is high in the early stages of infrastructure development. But that does not affect the network infrastructure’s income-generating capacity. And interest expenses will gradually ease when interest rates fall.
Once depreciation and interest expense ease, profits could spring up. And with capital expenditure slowing in the future, the telcos would have more cash to repay debt and grow dividends. Both BCE and Telus are dialling up for future 5G profits.
Is now a good time to buy BCE and Telus?
The market is in bearish momentum over concerns about another interest rate hike by the Bank of Canada. These worries have pulled BCE and Telus shares down 6% and 10%, respectively, in the last 30 days. Now is a good time to buy these stocks and lock in a higher dividend yield of 6.2% and 5.6%, respectively.
If you invest $5,000 now, you can buy 194 shares of Telus, which is 20 extra than you could have bought in early May. The additional 20 shares could earn around a $28.60 dividend per year. In the case of BCE, a $5,000 investment now can buy you five more shares than it could have in early May and earn you a $19.35 annual dividend. It might look small, but when compounded can make a significant difference.
These are the stocks to buy at every dip as they set the stage to ride the long-term AI and 5G revolution.