BCE vs. TELUS: Which TSX Stock Is a Better Buy?

BCE and TELUS both provide high income for investors. However, TELUS can provide higher growth, which makes it a better buy.

Kay Ng

Kay began investing in dividend stocks around 2008 via the concept of value investing. Since then, she has expanded into growth investing, including in small caps. Her passion for investing has only grown over the years! After graduating from UBC with a BSc in Computer Science, she took university courses in financial markets, finance, and financial accounting. She has contributed her works to Motley Fool, Sure Dividend, and Seeking Alpha.

Published August 10, 2024 9:30 am EDT

BCE (TSX:BCE) and TELUS (TSX:T) are two behemoth Canadian telecom stocks with gigantic dividend yields right now, which mesmerize income investors. Which is a better buy today? Let’s find out.

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Dividends

The big dividends, which the big Canadian telecoms have increased for years, are surely one massive attraction for investors.

At $48.08 per share at writing, BCE offers a dividend yield of almost 8.3%. TELUS’s dividend yield is also high but not as high at 6.9% at $22.51 per share at writing.

BCE’s trailing 12-month (TTM) payout ratio is 174% of net income, 49% of operating cash flow, and 74% of free cash flow in the period. In comparison, TELUS’s TTM payout ratio is 181% of net income, 29% of operating cash flow, and 109% of free cash flow.

Both their dividend payout ratios look stretched from the perspective of earnings. However, their dividends have coverage from their operating cash flows.

Here is their history of dividend growth. BCE has increased its dividend for about 15 consecutive years. Its five- and 10-year dividend-growth rates are just north of 5%. TELUS has a 20-year dividend-growth streak. Its five- and 10-year dividend-growth rates are 6.7% and 7.9%, respectively.

Valuation and growth

TELUS has historically experienced higher growth, as suggested by its dividend-growth rates mentioned above. Its higher growth potential is also reflected in its valuation multiple. TELUS trades at about 23 times earnings, while BCE trades at a price-to-earnings (P/E) ratio of about 15.

TELUS stock’s long-term normal P/E over the last decade or so is about 19.4, whereas BCE’s is 16.9. Based on these metrics, TELUS stock is a little overpriced, and BCE stock is a little underpriced. However, should TELUS be able to turn a profit in its side businesses in the health, security, and agriculture industries, it could be the catalyst for a turnaround in the stock.

What do analysts think? According to TMX Group, there are three “buy” and seven “hold” ratings on BCE. Together, their consensus 12-month price target on the stock is $50.11, which represents a discount of about 4%. This essentially means they think the stock is fairly valued.

For TELUS stock, there are six “buy” and four “hold” ratings with a consensus 12-month price target of $24.43, which represents a discount of about 8%. So, TELUS stock is also about fairly valued.

Over the next five years, TELUS stock has a better chance of delivering total returns of 10% per year or higher.

Is BCE or TELUS stock a better buy?

Although BCE stock offers a higher dividend yield, TELUS has a better chance of delivering higher total returns over the next five years. Therefore, I think TELUS is a better buy today. Its dividend yield of about 6.9% is not bad either.

For every $1,000 invested, investors can earn $69 per year, and this dividend income is expected to grow over time. That said, the stock appears to be fairly valued. Therefore, interested investors should aim to buy shares of TELUS on weakness, such as during market corrections.