Better Buy: TELUS Stock or BCE Shares?

TELUS and BCE are two of the largest telecommunication Canadian stocks and major dividend payers. Which is a better buy now?

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TELUS Corp. (TSX:T) and BCE (TSX:BCE) are two of Canada’s most well-known telecommunications stocks. With markets caps respectively of $36 billion and $53 billion, these are also two of Canada’s largest companies.

Both have strong market positions, but both have features that make them unique. Which begs the question, what stock is a better buy today? Let’s discuss below.

TELUS: Differentiated services differentiate the stock

TELUS is headquartered in Vancouver. It is regarded as the market leader in Western Canada. TELUS provides traditional wireline and wireless services like cellular plans, internet, and cable.

However, TELUS also provides security and automation services for home and businesses. It is a Canadian leader in virtual health and employment benefits, and customer experience (through its stake in TELUS International); and it also has a growing agriculture/ food technologies business.

Over the past few years, it has consistently led peers in new customer additions. Last quarter, TELUS added 300,000 net new customers (a 10% year-over-year increase).

TELUS has nearly completed its build out of fibre optic across its entire network. Consequently, it expects solid high-single digit to low-teens growth in revenues and adjusted earnings before interest, tax, depreciation, and amortization (EBITDA). With its large capex cycle nearly complete, it does expect to reap higher excess cash in the coming years.

That all bodes well for its dividend. TELUS has grown its dividend by a 7.8% compounded annual growth rate (CAGR) for the past decade. This stock has a target to keep growing its dividend by 7-10% annually through to 2025. Today, TELUS stock yields 5.7%.

Now, TELUS does have a lot of debt. It has a net debt-to-EBITDA ratio of 4.8 times. Given the above cash flow growth, it should be able to pay down debt reasonably quickly.

The debt is a concern shareholders need to factor in, especially with interest rates rising. Also, with the recent Rogers-Shaw deal completed, many expect there to be higher competition in Western Canada. Pricing pressure is another concern to consider.

BCE: The Canadian telecom behemoth

BCE is based out of Montreal and has operations that spread across Canada. It is by far Canada’s largest telecommunications provider. It too is diversified with operations spanning cellular, internet, television, media, business, and even retail services (the Source).

BCE’s growth has been much less consistent than TELUS’. Both revenue and EBITDA growth have fluctuated in a range and been largely stagnant over the decade. Despite its size, its net new customer addition growth has lagged that of TELUS.

In particular, its investments in media have not proven particularly fruitful, and that segment has fluctuated significantly over the years.

Right now, BCE only targets low-single digit revenue and EBITDA growth in 2023. The telecom space has become more competitive in 2023, and some analysts worry that BCE has the largest market to lose.

While the company pays an attractive 6.8% dividend yield, its dividend growth has lagged that of TELUS. It has only grown its dividend at a 5% CAGR over the decade. That may slow even further as BCE’s free cash flow growth appears to be stagnating.

BCE does have a better balance sheet with only 3.6 times net debt-to-EBITDA. However, the large stalwart appears to lack the growth to substantially bolster its share price or grow its dividend from here.

The Foolish takeaway

While both stocks have lagged this year, TELUS stock has nearly doubled the performance of BCE stock over the decade. I think this is related to some clever positioning by management to differentiate its service offerings.

Both these stocks are set to face higher competitive, macro, and earnings pressure. However, TELUS appears to be able to de-lever debt faster and likewise grow its dividend faster. For that, TELUS is my pick, but one does need to be cautious with this industry in general.

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 Robin Brown has positions in Telus International. The Motley Fool recommends Rogers Communications, TELUS, and Telus International. The Motley Fool has a disclosure policy.

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