The Canadian telecom market has been through tough times. The sector is undergoing a technological upgrade, regulatory change, and market share shift. In the technology space, a new company can disrupt a market giant. But is that possible for telecom infrastructure?
The infrastructure segment is capital-intensive, which makes it difficult for small players to challenge telecom giants. BCE (TSX:BCE) and Telus Corporation (TSX:T) have that edge in 5G infrastructure, covering 90% of the Canadian population, which provides them stability even in volatile markets. Let’s see how.
BCE and Telus can provide stability in volatile markets
Trump tariffs have increased economic uncertainty given the significant dependence of the Canadian economy on exports to the United States. There are fears of a recession. The stock market is acting up on these fears, creating an opportunity to buy the dip. Telecom giants remain unaffected by the above factors. However, Canada’s immigration policies could slow growth of new subscribers in 2025.
BCE and Telus spent billions of dollars building the fibre infrastructure. It is expensive to build a dense 5G infrastructure network on the vast lands of Canada. The first step that requires significant capital outlay is behind them. The debt on their balance sheet will normalize as the capital expenditure requirement reduces.
The two also took a hit on the average revenue per share (ARPU) as they engaged in a price war to capture maximum subscribers for their respective networks. They are now restructuring their businesses to monetize the 5G infrastructure.
Canadian telecom giants monetize 5G opportunity
BCE is building up cloud network solutions, business technology, and digital media solutions and scrapping or offloading low-margin radio and broadcasting services. Even Telus is investing in digital and artificial intelligence (AI) solutions. Why would telecom companies need such technological infrastructure?
The 5G revolution will bring AI to the edge. In 4G, high-speed mobile data services enabled live streaming and video calls. In 5G, telcos have to go beyond voice and data services and offer Internet of Things (IoT) and mobile data management services, such as automotive connectivity, augmented reality and virtual entertainment, video streaming, data security services, and more. These devices should do edge computing and need secure cloud networks and technology solutions.
These solutions could open new revenue streams for the telecom giants. Since they have an upper hand with the most advanced fibre networks, they can bundle services and optimize their network capacity. This could increase their ARPU and cash flow, thereby enabling them to pay incremental dividends and reduce debt.
Canadian telecom giants tackle regulatory changes
The telecom regulator forced the telecom giants to share their network with competitors, removing the exclusivity of the giants. However, the two have found a way around it.
Telus is using this mandate to its benefit and offering bundled services in new markets through its competitor’s network. This is posing competition to small players that do not have bundled services.
BCE is exiting low-margin, highly regulated services and venturing into high-margin, fast-growing services that would be more relevant in the 5G era.
Both have reduced their investment in fibre networks as the return on investment is not that attractive anymore. While the significant debt and restructuring costs could pull down net profit in the short term, the margins could grow steadily in the long term.
BCE and Telus stocks are trading near their multi-year lows, which has inflated their dividend yields respectively to 12.3% and 8.1%. Lower free cash flow due to high debt servicing costs has inflated payout ratios. BCE even paused dividend growth till the ratios normalize.
The declining interest rates and cost savings from restructuring could bring some respite and help the telecom giants improve their cash flows. Buying these stocks at their current dip reduces the downside risk, locks in higher dividend yields, and opens up the opportunity to participate in the 5G rally once the infrastructure spending pays off.
