Telus (TSX:T) and BCE (TSX:BCE) shares have been beaten down badly over the last 12 months. In that period, Telus stock has fallen 21%, and BCE stock has fallen 13.8%.
Thanks to the beatdowns they have sustained, T and BCE now have very high yields. At today’s prices, T stock yields 6.5%, while BCE stock yields a massive 7.5%. These are the kinds of yields that produce large amounts of dividends in investors’ accounts … even with relatively modest amounts of money invested upfront.
It’s true that 2022 and 2023 have been tough years for telcos. Between rising interest rates, a slowing economy, and a slowdown in new smartphone sales, things have been going badly. Now, however, we may be starting to see interest rates stabilize. If that’s the case, the telcos’ future may be better than their recent past.
Why times are getting better for telcos
The main reason why times are getting better for telcos is because interest rates are beginning to stabilize.
Telus and BCE’s earnings fell last year because central banks spent the entire year raising interest rates. We went from nearly 0% interest rates at the start of 2022 to 5% interest rates in early 2023. That hurt telcos like Telus and BCE, because such companies have a lot of debt. Telecommunications services are very expensive to run; there’s realistically no way to pay for such services except to borrow money. Borrow they did, and when rates rose, they were left with no other choice but to take high interest rates on the chin. For this reason, both T and BCE saw their earnings decline in the second quarter.
Telus’s and BCE’s recent earnings
Despite earnings declining, we can see some encouraging signs in Telus and BCE’s most recent earnings releases.
In the most recent quarter, Telus delivered the following:
- $4.9 billion in revenues, up 12%
- $196 million in net income, down 60%
- $0.14 in earnings per share (EPS), down 58%
- $1.58 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA), down 3%
- $279 million in free cash flow (FCF), up 36%
BCE, for its part, delivered the following:
- $6 billion in revenue, up 3.5%
- $397 million in net income, down 39%
- $722 million in adjusted net income, down 8.7%
- $0.79 in adjusted EPS, down 9.2%
- $2.3 billion in cash from operations down 8.9%
- $1 billion in free cash flow
As you can see, at both companies, revenue increased while earnings declined. That’s largely because of rising interest rates, which drive higher interest expenses. However, not all was bad in the second quarter for Canada’s biggest telcos. Free cash flow increased at Telus, while BCE at least earned enough to keep paying its sky-high dividend.
Also, interest rates are beginning to stabilize. The Federal Reserve and Bank of Canada raised interest rates every single quarter in 2022; in 2023, the banks simply paused (i.e., didn’t hike or cut rates). If the central banks continue on this path, the telcos will have an opportunity to grow their earnings, as their revenue will rise while interest expenses stay flat.
