Better Buy: TELUS vs BCE Stock

TELUS and BCE are trading with massive dividend yields right now? But does that make them a good buy? Here’s the better stock today.

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TELUS (TSX:T) and BCE (TSX:BCE) are some of Canada’s best-known telecommunication stocks and most beloved dividend stocks. Yet, telecommunication stocks have seriously lagged in the past two years.

Many dividend investors are likely wondering if they are good buys due to the price decline or if they are value/dividend traps. Likewise, which stock is a better buy if you feel inclined to own the sector?

Let’s dig down and see whether TELUS or BCE is a better buy today.

BCE: Canada’s largest telecom, but bigger isn’t always better

With a market cap of $45 billion, BCE is by far the largest telecommunications business in Canada. Despite its size, it has been facing several challenges as of late. This can be evident in its stock action.

Its stock has declined -8% in 2024 and -18% over the past 52 weeks. Its dividend yield has soared to over 8%. That is the highest it has ever been. While that big dividend might be attractive, it is also signalling that there are substantial risks facing this business.

Debt and a myriad of headwinds for BCE

BCE has loaded up considerable debt to finance spectrum offerings and fund a large capital backlog. That strategy was okay when interest rates were 2%, but not so when they are 5%. As its fixed debt rolls over, it has a considerable wave of interest expense that will continue to eat into earnings.

In the fourth quarter, revenues were stagnant and net earnings fell by 23%. Factors such as rising interest rates, a challenging regulatory environment, rising operating costs, increased competition, and a weak media segment led to weaker-than-expected 2023 results. The company had to complete a significant restructuring and lay off 9% of its employees.

No end to the dark clouds surrounding BCE

The worry is that these dark clouds don’t appear to be going away any time soon. Right now, BCE is not funding its dividend with earnings or cash flows. Consequently, many analysts believe dividend growth will stall. There is a rising risk the dividend could even be cut.

Given these various factors and challenges, BCE’s 8% dividend yield still does not appear to be enough compensation for the issues its business faces right now.

TELUS: Western Canada’s telecom stock

Certainly, TELUS is not completely immune to the challenges facing the telecom industry. Its stock is down 3% in 2024 and 13% over the past 52 weeks. Its 6.3% dividend is not as substantial as BCE’s, but it isn’t far from levels achieved during the 2009 Great Financial Crisis.

TELUS’s focus on Western Canada has somewhat insulated it from some of the issues BCE faces. Likewise, it has been much quicker to adjust its cost structure to the changing macro and competitive environment. In the summer of 2023, it made substantial cuts to its workforce and implemented efficiency measures.

TELUS seems to be turning a page

Its fourth-quarter 2023 results came out better than expected. It appears TELUS is gaining market share after it booked record new customer additions. Net income recovered 17% in the quarter. 2023 was still a pretty awful year for TELUS, but it appears it is turning a corner.

The company has been promising a wave of free cash flow as it slows its infrastructure spending. It expects to earn at least $2.3 billion of cash in 2024.

While its dividend is not currently supported by earnings or cash flow, it should be able to afford its current dividend-growth trajectory if it can achieve its cash target.

The takeaway

TELUS is probably the safer bet of these two. Both BCE and TELUS face challenges and could be in the dumps for some time. However, TELUS looks like it is best positioned to recover faster and move onward (and hopefully upward).

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 no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.

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