The telecom sector has been under pressure over the last few years due to unfavourable regulatory policy changes, increasing competition, the need for substantial capital investments to upgrade infrastructure, and stagnating revenue streams. This year, the sector has also underperformed, with BCE (TSX: BCE) and Telus (TSX: T) delivering 4% and 15.2% returns, respectively. Meanwhile, let’s look at the recent performances and growth prospects of these two prominent telecom players to determine which stock would be a better buy right now.
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BCE
BCE is one of the three top telecom players in Canada. In its recently reported second-quarter earnings, the company’s top line grew 1.3% to $6.085 billion, while its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) contracted by 0.9% due to higher operating expenses aimed at supporting sales growth. Also, its adjusted EBITDA margin declined by 1% to 43.9%.
The company also generated $1.95 billion of cash from its operating activities, representing an 8.9% decline from the previous year’s quarter. Higher severance expenses and weaker cash generation from working capital led to a decrease in operating cash flows. However, free cash flows rose 5% to $1.15 billion, supported by lower capital spending and reduced dividend distributions by subsidiaries to non-controlling interests.
Moreover, BCE in August acquired Ziply Fiber for $5 billion, adding 1.4 million fibre internet customers in the United States. The strategic acquisition could help expand its reach to eight million locations across the United States. The company has also made strategic investments in expanding its presence in the artificial intelligence (AI) sector through Bell AI Fabric. Along with these expansions, BCE’s growing wireless customer base could support its financial growth. It has also initiated company-wide transformation and efficiency initiatives, which could deliver $1.5 billion of cost savings by 2028.
Amid these healthy growth prospects, BCE’s management projects its revenue and adjusted EBITDA to grow at an annualized rate of 2-4% and 2-3%, respectively, through 2028. Further, the company also expects its free cash flow after payment of lease liabilities to grow at a 15% CAGR (compound annual growth rate).
Meanwhile, BCE, a reliable dividend-paying company that has consistently raised its dividend since 2008, cut its quarterly dividend payout in May by more than 56% to $0.4375/share. Intensified price competition and ongoing regulatory uncertainty have weighed on its financial performance, prompting a dividend reduction. Despite the dividend cut, it currently offers a healthy yield of 5.23%. Moreover, the company has adopted a disciplined dividend strategy and hopes to pay $5 billion in dividends between 2025 and 2028. Now, let’s look at Telus.
Telus
Telus reported a healthy second-quarter performance in August, with its top line growing by 2.2% to $5.08 billion. The increase in revenue from its fixed data, health, and digital services more than offset the decline in revenue from its mobile products and services, driving the company’s total revenue. Meanwhile, the company expanded its customer base by 198,000 during the quarter. The company’s adjusted EBITDA increased by 0.83%, supported by revenue growth and cost-saving measures, including workforce reductions. However, higher restructuring expenses partially offset some of the gains.
Although its operating cash flows declined by 16% to $1.2 billion, its free cash flows rose 11% to $535 million. Moreover, the company has planned to invest around $70 billion through 2029, expanding its 5G and broadband infrastructure. Additionally, its strategic investments, innovative product launches, expansion of sales channels, and effective cost management have boosted the financials of its health business. Along with these growth initiatives, the company strengthened its financial position by selling a 49.9% stake in its wireless tower infrastructure business last month for $1.26 billion. The company’s management expects to utilize the net proceeds to reduce its leverage, potentially lowering its net debt-to-adjusted EBITDA multiple by 0.17.
Additionally, Telus has a solid track record of dividend growth, having raised its dividend 28 times since May 2011. Given its healthy growth prospects, the company’s management is confident of increasing its dividend at an annualized rate of 3-8% through 2028.
Investors’ takeaway
Although both telecom companies offer attractive dividend yields, I am more optimistic about Telus given its strong business fundamentals, superior growth prospects, consistent dividend growth record, and comparatively higher yield.
