Telus (TSX: T) is a stock I have had some success covering lately.
On July 13, I wrote that the company had an excessive payout ratio and would likely cut its dividend. I further wrote in the same article that the company was likely to sell off after announcing any dividend cut, as Canadian investors have a known dividend preference. On July 30, the company put out an earnings release in which it revealed that it would, in fact, be cutting its dividend, and subsequently declined by some 11.5% in the markets on the next trading day. To say my recent Telus coverage was accurate would be an understatement.
Despite all that, there is one thing my Telus article from last month was definitely missing: ideas about what to do with money that one might have invested in Telus.
While it’s easy enough to point out that a particular stock is looking risky in some way (e.g., paying out more than it can afford to in dividends), it’s harder to recommend a decent alternative.
Truthfully, for most investors, the alternative in question is probably index funds. They are the lowest-risk investment with the highest expected return, assuming the person considering investing in them has no special business insights.
If you’re interested in individual stocks, however, I have an alternative to suggest that might perform a little better than Telus over the long run. Even after Telus’s recent selloff, this stock is still cheaper than T, and that’s despite it being a much stronger player in the national telco scene. While I’m not invested in the stock personally, that’s mainly because I’m not interested in telcos as a group. To those who are interested in Canadian telcos: I’m fairly certain that the stock I’m about to name will perform better than Telus over the long term, for reasons I’ll outline below.
Source: Getty Images
Rogers Communications
Rogers Communications (TSX: RCI.B) is a Canadian telecommunications company that is much stronger than Telus in many ways, yet still trades at a lower price-to-earnings ratio than Telus does. It has a bigger 5G network than Telus does, a wider national presence, and more geographic diversification. It is also the beneficiary of recent consolidation in the Telco space, having acquired Shaw (and all of its customers along with it). Despite this, Rogers trades at just 9.5 times earnings, while Telus trades at 16.3!
A sensible payout ratio
One thing that Rogers has going for it today is a sensible payout ratio (that is, dividends paid as a percentage of total earnings). RCI.B’s ratio is 40%, Telus’s even after the cut will be just under 100%. So, even with Telus cutting its dividend, Rogers still has a much healthier payout ratio, which means more earnings to retain and invest back into its business.
Decent growth
Unique among Canadian telcos, Rogers has actually been doing pretty decent growth in recent years. Over the last 12 months, the company’s revenue increased 8%, and its earnings grew 307% year on year. Its compounded annual growth rates (CAGR) in these categories were pretty healthy over the last three- and five-year periods, too. Telus, however, saw its revenue shrink and its earnings barely increase in the trailing 12-month period. The same basic trend held over the trailing three- and five-year periods.
An M&A winner
Rogers recently made a big win by buying out Shaw, a deal that saw Rogers take over 80% of that company’s assets. Rogers had to unwind Freedom Mobile to Quebecor to comply with competition rules. The deal improved Rogers’s market share, although Quebecor’s strategy with Freedom Mobile (very low-priced plans) is increasing price competition in the telco space. It’s a tough time for Canadian telcos in general, which is why I’m not investing in the space. Nevertheless, Rogers is better positioned than most of the others, and it is likely to outperform Telus and its other large telco peers going forward.
