The telecom sector has been under pressure in recent years due to adverse changes in regulatory policies, increasing competition, the need for substantial capital investments to modernize infrastructure and stagnant revenue streams. The sector once again underperformed this year B.C (TSX:BCE) and Telus (TSX:T) yields 4% and 15.2% respectively. In the meantime, let’s take a look at the recent performance and growth prospects of these two prominent telecom players to determine which stock would be a better buy right now.
B.C
BCE is one of the three largest telecom players in Canada. In its recently reported second-quarter earnings, the company’s revenue grew 1.3% to $6.085 billion, while adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) fell 0.9% due to higher operating costs aimed at supporting top-line growth. The adjusted EBITDA margin also decreased by 1% to 43.9%.
The company also generated $1.95 billion in cash from its operations, down 8.9% from the prior year quarter. Higher redundancy costs and weaker cash flow 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 expenditures and lower dividend payments by subsidiaries to minority interests.
Additionally, in August, BCE acquired Ziply Fiber for $5 billion, adding 1.4 million fiber internet customers in the United States. The strategic acquisition could help expand its reach to eight million locations in the United States. The company has also made strategic investments in expanding its presence in the artificial intelligence (AI) sector through Bell AI Fabric. Together with these expansions, BCE’s growing wireless customer base could support its financial growth. It has also initiated company-wide transformation and efficiency initiatives that could deliver $1.5 billion in cost savings by 2028.
Amid this healthy growth outlook, BCE management expects revenue and adjusted EBITDA to grow 2-4% and 2-3% annually through 2028, respectively. Furthermore, the company also expects free cash flow after paying lease obligations to grow at a CAGR of 15% (compound annual growth rate).
Meanwhile, BCE, a reliable dividend-paying company that has consistently increased its dividend since 2008, cut its quarterly dividend payout by more than 56% in May to $0.4375/share. Intensified price competition and continued regulatory uncertainty have negatively impacted the company’s financial performance, prompting a dividend cut. Despite the dividend cut, it currently offers a healthy yield of 5.23%. Furthermore, the company has followed a disciplined dividend strategy and hopes to pay out $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 revenue growing 2.2% to $5.08 billion. The increase in revenue from fixed data, health and digital services more than offset the decline in revenue from mobile products and services, boosting the company’s overall revenue. Meanwhile, the company expanded its customer base by 198,000 during the quarter. The company’s adjusted EBITDA rose 0.83%, supported by revenue growth and cost-cutting measures, including workforce reductions. However, higher restructuring costs partially offset some of the gains.
Although operating cash flows fell 16% to $1.2 billion, free cash flows rose 11% to $535 million. Additionally, the company plans to invest approximately $70 billion to expand its 5G and broadband infrastructure through 2029. Moreover, the strategic investments, launch of innovative products, expansion of sales channels and effective cost management have boosted the financial performance of the healthcare business. Along with these growth initiatives, the company strengthened its financial position by selling a 49.9% stake in its wireless tower infrastructure business for $1.26 billion last month. The company’s management expects to use the net proceeds to reduce debt, potentially reducing the net debt to adjusted EBITDA ratio by 0.17.
Additionally, Telus has a solid track record of dividend growth, having raised its dividend 28 times since May 2011. Given the healthy growth prospects, the company’s management is confident it will increase its dividend by 3-8% annually through 2028.
Investor takeaway
While both telcos offer attractive dividend yields, I am more bullish on Telus given its strong business fundamentals, superior growth prospects, consistent dividend growth, and relatively higher returns.
#Interested #BCE #shares #Telus