Telus (TSX: T) is among Canada’s most talked-about dividend stocks right now. After cutting its dividend 55%, the company saw its stock tumble 29% in the markets, leading to a P/E ratio lower than historical norms. Despite the dividend cut, T stock still has a high yield, due to the rapid and precipitous decline in the stock’s price.
At today’s price, Telus stock yields approximately 6.7%. While this is not as high as the pre-cut yield, it is still far above average by TSX standards. The fact that such a well-known company has a yield nearly 3.5 times that of the broader TSX index has made Telus stock a subject of interest on investing on social media.
Unfortunately, Telus remains a risky proposition. In the most recent quarter, Telus paid $0.19 in dividends per share, while net income and earnings per share (EPS) were deeply negative. The company faces competitive pressure from both Freedom Mobile’s cheap plans, and the deeper pockets of Canada’s larger telco players. So, there isn’t much reason to expect a big earnings reversal for Telus.
That isn’t to say that the Canadian telco space is completely fruitless, however. Some Canadian telcos are actually quite profitable, growing, and cash flow positive, with payout ratios well under 100%. In this article, I will explore one such telco and make the case that it is a more intriguing opportunity than Telus stock today.
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Rogers
Rogers Communications (TSX: RCI.B) is a telecommunications stock that – by most metrics – is far better than Telus. The company has more brand recognition across Canada, a better reputation with both clients and investors, and better financials than Telus does. The company’s revenue, earnings and free cash flow (FCF) growth rates were stronger than Telus’s in the trailing 12-month period. Rogers also has a far lower payout ratio than Telus does. Despite this, RCI.B stock trades at a lower P/E ratio than Telus!
Telus vs Rogers: Financials
In the trailing 12-month period, Telus grew its revenue by -1%, its operating earnings by 2%, and its free cash flow by -8%. Its earnings were negative in the TTM period. Rogers by contrast grew its revenue by 8.7%, operating earnings by 2.7%, earnings by 307%, and its FCF by 12%. Rogers clearly beat Telus on growth in the TTM period. Its stronger brand and lower payout ratio (i.e., greater re-investment power) argue that Rogers will continue outgrowing Telus long term.
Rogers also has Telus beaten on profitability.
In the TTM period, Telus had a 35% gross margin, a -4.5% net margin, an 11.9% FCF margin and a -6.5% return on equity. Rogers by contrast had a 44% gross margin, 27% net margin, 33.5% FCF margin and 4% return on equity. All of these metrics favour Rogers over Telus.
Telus vs Rogers: Valuation
Having seen Rogers’ clear superiority to Telus going by most of the commonly looked at growth and profit metrics, you might expect Telus to trade at a discount to Rogers. Think again! Rogers is actually the cheaper of the two stocks by some measures, trading at 8.6 times earnings vs. Telus’s 13. Telus does have lower price/sales and price/book ratios, but remember, it’s ultimately earnings and not revenue or equity that drives long-term dividend potential.
Dividend potential
Last but not least, Rogers has a 4.6% dividend yield compared to Telus’s 6.7%. This comparison might seem to favour Telus, but remember that Rogers has a much better payout ratio and growth track record. Over the long run, Rogers might end up paying more dividends than Telus.
Taking into account all of the factors discussed above, I consider Rogers to be a much more compelling opportunity than Telus today.
