Telus's share price has declined 35 per cent over the past three years.Justin Tang/The Canadian Press
There was a time when a Canadian telecom stock was close to a sure thing: It outperformed the broad stock market index, paid a steadily rising dividend and withstood economic downturns.
Those days are over.
When Montreal-based BCE Inc. BCE-T slashed its quarterly dividend by 56 per cent earlier this month, the company acknowledged concerns among some investors and analysts that it was distributing more to shareholders than it was generating in profits.
This wasn’t a short-term thing but the result of a tough stretch for BCE over several years.
BCE’s two largest competitors aren’t exactly thriving either.
The share price of Vancouver-based Telus Corp. T-T has declined 35 per cent over the past three years. (Sad disclosure: I own shares in BCE and Telus.)
The share price of Toronto-based Rogers Communications Inc. RCI-B-T has fallen 34 per cent over the past year alone after investor enthusiasm over its $20-billion takeover of Shaw Communications – finalized in 2023 – began to fizzle.
By some measures, the sector looks cheap. Big dividends, even with BCE’s lower payout, are hard to ignore. And, with sentiment toward the sector in the dumps, stock prices may have bottomed out.
But is that enough to win back long-term investors? Telecommunications firms face fierce competition, shifting regulations and limited growth opportunities, which are standing in the way of a comeback.
To get a sense of how much these challenges are weighing on investor sentiment, consider this before-and-after snapshot of BCE’s performance.
Over the past three years, BCE’s image has taken a beating. Promises of steady growth have turned to concerns about heavy debt loads. Diversification into sports and media has begun to look unfocused.
And the company’s formerly reliable dividend is now considerably smaller after the yield soared above 13 per cent earlier this year.
“Some stocks get unfairly punished,” said Stephen Takacsy, chief executive officer at Lester Asset Management in Montreal.
But in the case of BCE, he said, “there was no growth. It just wasn’t adding up.”
BCE’s share price has trailed the benchmark S&P/Composite Index by 74 percentage points (including dividends) since April, 2022, marking a dismal stretch that has shaken the stock’s once-stellar reputation as a core holding that investors could buy, hold and forget.
Mr. Takacsy ditched the stock when it was trading at about $54 (it’s dipped below $30 lately) and the dividend yield appeared unsustainably high, underscoring how the buy-and-hold mentality that once defined the telecom sector has eroded.
He’s not alone in giving up on BCE. According to data provided by Morningstar Direct, the number of Canadian dividend funds that hold BCE shares trails other big telecom stocks by about 40 per cent, on average.
Declining interest in the stock among the pros follows what had been a terrific long-term track record for the stock.
Over 20 years from April, 2002, to April, 2022, BCE delivered a return of 565 per cent, including dividends, tripled the size of its quarterly payout and outperformed the S&P/TSX Composite (including dividends) by an overwhelming 188 percentage points.
All of this came as the emerging business of providing lucrative wireless and internet service more than made up for the fading glory of old landlines.
More people with mobile phones and internet connections meant more revenue for Canada’s biggest telecoms.
The problem is that revenue growth has deteriorated as the market matures, competition intensifies, regulators introduce pro-consumer policies and population growth subsides.
“There are better places to be,” said Laura Lau, chief investment officer at Brompton Group in Toronto, who isn’t invested in telecom stocks.
Canadian banks, for example, have proven their economic resilience and ability to pump out dividends in good times and bad.
Utilities also look strong, as they catch interest in the electrification trend and see opportunities in the expansion of artificial intelligence data centres. In its first quarter, Hydro One Ltd. reported revenue growth of 11.2 per cent compared with the same period in 2024.
By comparison, Telus increased its revenues by just 3 per cent in its first quarter.
And that result was the highest among the big telecoms. At Rogers, revenue increased by a mere 2 per cent in its first quarter, while BCE’s revenue declined 1.3 per cent from last year.
Strong competition – caused by the emergence of Quebecor Inc. as a fourth national wireless provider with its aggressive Freedom Mobile brand – has led to an intense price war for subscribers.
Quebecor grabbed 45 per cent of new wireless customers in the first quarter, making it a rarity among telecoms: a standout performer with a winning share price.
“It was sort of handed the fourth national wireless franchise on a silver platter,” said Mr. Takacsy who owns shares. “It was a good buy just on that basis.”
For the bigger incumbents, though, competitive headwinds have driven down subscription prices and weighed on roaming fees.
At Telus, the average revenue per mobile phone customer fell 3.7 per cent in the first quarter, to $57.13.
In a conference call with analysts earlier this month to discuss financial results, Darren Entwistle, CEO at Telus, referred to the price war as a “race to the bottom.”
Consider that eight years ago – in the first quarter of 2017, when telecoms were must-have stocks – the average revenue per user at Telus had risen for 26 consecutive quarters, to $65.53.
The recent retreat is good news for consumers who have long complained about high fees associated with mobile phones in Canada and limited competition. But it’s not so great for investors.
The bullish case – hardly a solid bet – now rests on a combination of greater efficiency and opportunities beyond traditional subscriber growth.
For efficiency, telecoms are cutting costs by shedding jobs. Telus eliminated a net 3,330 jobs last year. BCE announced a 4,800-person cut in February, 2024. At Rogers, the number of employees fell by 2,000 last year.
They are also pinning their hopes on technology.
Bain & Co., the consultancy, expects that greater adoption of AI will increase work force productivity at U.S. telecommunications firms – it shouldn’t be much different in Canada – by at least 15 per cent.
For opportunities, telecoms are expanding.
Last year, BCE announced a $5-billion deal to acquire U.S. internet provider Ziply Fiber, which it hopes will provide a door to millions of new customers in the Pacific Northwest region.
Rogers bought Calgary-based Shaw, giving it a national presence, and continues to invest heavily in sports. Earlier this year, for example, it signed an $11-billion deal to broadcast NHL games in Canada
Telus has grown its health division – which includes medical record-keeping and workplace wellness programs – into a large entity that generated revenue growth of 12 per cent in the first quarter.
Low share prices suggest a giant shrug from investors, which have driven dividend yields to undeniably attractive levels. But are dividends now tainted by BCE’s recent cut?
With BCE’s new payout, its dividend yield is 5.9 per cent. Telus has a yield of 7.6 per cent. And Rogers, not usually prized for its payout, now yields 5.7 per cent.
These yields are higher than most other dividend stocks, not to mention fixed-income investments such as bonds and guaranteed investment certificates, making telecom stocks hard to resist for investors who want income.
But dividends do not come with a guarantee, and high yields suggest investors are on edge.
High payout ratios, which describe how much of a company’s cash flow is distributed as dividends, leave little room for error. And they suggest that dividend hikes could be limited.
With BCE’s dividend cut – and no mention from the carrier of plans to increase the quarterly distribution from the current, lower level – its payout ratio will decline to 70 per cent, according to Maher Yaghi, an analyst at Bank of Nova Scotia.
For Telus, though, he calculated that the ratio has been above 100 per cent since 2015 − meaning that it is paying out more than it is bringing in – and will likely remain at this high level through the end of 2027.
In a sign of confidence, Telus raised its dividend by 3.5 per cent earlier this month. It expects to increase the payout by 3 per cent to 8 per cent, at an annualized pace, from 2026 through 2028.
But this upbeat outlook has its doubters.
“We believe dividend increases need to remain as low as possible until free cash flow distribution drops consistently below 100 per cent,” Mr. Yaghi said in a note.
Dividends are the star attraction of a telecom stock. They contributed about three-quarters of BCE’s total return over the two decades from 2002 to 2022, and about 60 per cent of Telus’ total return over this period.
The current elevated yields suggest that dividends could still play a big role in overall returns, especially if BCE’s dividend cut remains a one-off tragedy.
But if telecoms are entering a new era in which dividend growth is held back – or worse – total returns will suffer. At the very least, dividend-loving investors might look elsewhere for income.
Those who remain invested in the sector have to be comfortable with the jaw-dropping long-term debt levels at the three biggest telecoms.
BCE, Rogers and Telus have driven up their combined debt loads to an astounding $104-billion, up 60 per cent since the end of 2021.
Rogers financed its Shaw takeover with debt, which explains much of the increase. But competitors also loaded up as they improved their networks in anticipation of fierce competition ahead.
“At the time, it made sense because Canadian telecom was growing at a really nice clip, and there was a pathway for all three companies to deleverage through organic growth,” said Aniki Saha-Yannopoulos, a credit analyst at S&P Global.
That didn’t happen, leaving all three carriers with debt loads that are now uncomfortably high relative to their earnings – and facing tough choices in efforts to preserve their investment-grade credit ratings.
They are selling stakes in their infrastructure assets, such as cellphone towers. Rogers, for example, is raising $7-billion through a recent agreement with a consortium led by New York-based Blackstone Inc.
They are also slimming down. Last year, BCE sold its stake in Maple Leaf Sports & Entertainment – which owns the NHL’s Toronto Maple Leafs and the NBA’s Toronto Raptors – to Rogers for $4.7-billion.
Some observers expect Rogers could then sell a stake in MLSE itself, given that the valuable sports franchises are perhaps not reflected in Rogers’ beaten-up share price.
“There could be considerable upside for the stock if Rogers monetizes all or a portion of its sports assets,” said Mary Crowe, analyst and portfolio manager with the Canadian equities team at Beutel Goodman, in an e-mail.
And Telus is considering spinning off or selling a stake in Telus Health, which is potentially worth $5-billion or more.
Whatever happens, investors face a daunting future. Telecom stocks that were once revered for their stability are now the domain of contrarians willing to bet on what could be a difficult turnaround. They aren’t what they used to be.