BCE Inc (TSX:BCE) and Telus (TSX:T) are two of Canada’s best known telecommunications (telco) stocks. One is a nation-wide giant with operations in most provinces, as well as a media division. The other is largely a regional player, with major operations in BC, Alberta, and Quebec.
Like other Canadian telcos, BCE and Telus have not performed exceptionally well over the last few years. Telcos do not have especially strong pricing power, and they have been struggling with high debt levels and slow subscriber growth. The end result has been sluggish stock price appreciation and occasional dividend cuts.
In the past, I have made no bones about which TSX-listed telco I consider to be the best. That would be Rogers Communications, the national leader. Nevertheless, there is far more to the telco space than just that one stock. There may be value in BCE and Telus. In this article, I will explore the two companies side by side so you can decide which one is right for you.
The case for BCE Inc
One thing that BCE has going for it is diversified operations. It has a media division, Bell Media, which operates the CTV news station, as well as various radio and sports broadcasting services. Telus doesn’t have such operational diversification. So, that is one point arguably in favour of BCE (operational diversification is a good thing, but traditional broadcast media isn’t the most profitable today).
Another factor that BCE has over Telus is valuation. At today’s price, BCE stock trades at 12 times adjusted earnings, five times reported earnings, 1.3 times sales and 1.5 times book. By contrast, Telus trades at 19 times adjusted earnings, 24 times reported earnings, 1.3 times sales and 1.9 times book. BCE clearly trades at lower multiples.
An additional advantage that BCE has over Telus is a higher gross margin. BCE’s gross margin is 45%, while Telus’ is only 35%. This disparity makes the case that BCE has the potential to become more profitable than Telus. However, most of Telus’ other profitability metrics are actually higher today.
The case for Telus
A case for Telus can be built on dividend sustainability.
In the trailing 12 month (TTM) period, Telus had a 69% dividend payout ratio. Over the last six years, it has not suffered any dividend cuts. By contrast, BCE had an 84% payout ratio in the TTM period, and it had a dividend cut just last year. So, BCE has managed its dividend less well than Telus has over the years, and it still has a higher payout ratio today. These factors argue that Telus’ dividend is safer, better-covered, and more sustainable than BCE’s dividend.
Foolish bottom line
Taking everything covered in this article into account, I’d be inclined to favour Telus stock over BCE stock. While I actually found more quantitative factors favouring Telus than BCE, the dividend safety thing is a big deal for me. A company that cuts its dividend and still has a high payout ratio appears to be pushing it with dividends. So, I consider Telus the safer stock.
