The Canadian telecom industry is undergoing a structural change from an oligopoly market to a price-competitive market. This change was triggered by a regulation that allowed competitors to access Telus Corporation (TSX:T) and BCE’s (TSX:BCE) fibre infrastructure for a fee. The competition has disrupted the competitive advantage they had over smaller players and discouraged capital expenditure in infrastructure. While smaller players like Cogeco Communications and Quebecor surged as they could now expand their reach without significant capital investment, BCE and Telus plunged.
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Telus’ fundamentals begin to improve
Telus Corporation’s financials look stressed as its debt and dividend ratios are above its target range. However, the right way to look at the telco’s financials amidst this structural shift is to find the bottom and identify a point from where recovery begins.
As price competition heated up, Telus saw its average revenue per share (ARPU) fall. BCE and Telus were caught off-guard by this regulatory change, as they had already spent billions of dollars of debt capital to build the fibre infrastructure. They had significant interest expense and falling net income, which pulled down their stock price to multi-year lows.
Quebecor and Cogeco, on the other hand, did not have huge debt and enjoyed a surge in revenue as they could access new markets. However, there comes a point at which the advantage minimizes and the road ahead is competitive.
Telus reached that point in 2024 and grew its EPS for the first time in four years by 15.5% to $0.67. It is now growing its Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin to 36% in 2024 from 35.5% in 2023. Although the debt is high, it is distributed over the long term, running up to 2053. The company will reduce its debt and refinance some debt by issuing notes at a lower interest rate.
The fundamentals are now moving in the upward direction, making Telus an attractive investment despite a 21 times forward price-to-earnings ratio, which is higher than BCE’s 11.7 times and Quebecor’s 10.9 times.
Who will win the telecom race?
Among all telco players, Telus has the advantage of already established cloud, data, security, and digital solutions. TELUS Health and TELUS Digital Experience are already contributing 28% towards the company’s revenue. The telco has ample scope to offer bundled services and grow its ARPU and market share.
While Telus has accepted the regulatory change and started offering its services to new markets on competitors’ networks, BCE continues to fight back. BCE is rather investing in the United States’ fibre infrastructure, reducing competition for Telus. Moreover, Quebecor and Cogeco do not have a comprehensive services portfolio like Telus, giving Telus a competitive advantage.
In the 5G era, Telus is well-placed to boost its income sources. It has all that is needed to lead the 5G race in Canada. The technology solutions segment, which provides broadband and mobile data, still takes the lion’s share. However, the fast-growing Health and Digital Experience segments could drive future revenue growth.
Why invest all your TFSA contribution in Telus?
Telus stock is still trading near $22 per share as slowing immigration and economic growth are delaying premium subscription uptakes. The stock has bottomed out, and now it can only go in an upward direction. It is a good time to invest a lump sum amount in Telus and lock in a 7.5% yield.
After BCE’s dividend cuts, there have been concerns around Telus following suit, but Telus expects to sustain the dividend. It even reduced its dividend payout ratio to 76% in the first quarter of 2025, giving it flexibility to reinvest in the business.
Telus’s tight financial situation will gradually ease as capital expenditures fall and more cash flow is available to pay down debt. The company has also slowed its dividend growth rate to 3–8% for the 2026–2029 period from 7–10% in 2025.
An improvement in economic activity and the proliferation of 5G services could drive its profits in the coming years.
