Is recent telecommunication underperformance a hidden investment opportunity?

Approval of the 2023 merger of Rogers Communications and Shaw Communications came with certain conditions, chief of which was Shaw’s divestment of Freedom Mobile to Quebecor. This resulted in the introduction of a fourth national communications player in Canada and enabled the federal government to deliver on its promise of reducing wireless pricing. The wireless market saw monthly plans drop from $60 per month on average — plus roaming packages — to less than $40 per month on certain brands. However, though beneficial to the consumer, these lower prices contributed to sector underperformance.

In the decade following the 2007-2008 global financial crisis, the Canadian market experienced record low interest rates. For telcos, a low interest rate environment is especially beneficial. Not only do lower rates make funding large capital expenditures more affordable, their high and stable dividend yields make them more attractive to investors. At its peak during the COVID-19 pandemic in 2020, the yield spread between a 10-year Government of Canada bond and the average telco dividend was 4.45%. Once the Bank of Canada (BoC) started raising interest rates in March of 2022, this spread quickly declined, hitting its lowest point of 1.36% in June that same year.

Dividends are now once again one of the reasons why investors should give telcos more than just a passing glance. Although the sector has been challenged in recent years, the spread between bond and telco dividend yields has started to improve — 3.2% as of May 31, 2024. And with the BoC expected to continue lowering interest rates throughout the remainder of the year, it should only get better.

What’s more, although there has been speculation about the sector being able to sustain dividends, we believe telcos will continue to service their dividend commitments, with certain companies even growing them. 

While the telecommunications sector has gone through several changes over the last few years, we also believe the impacts of these changes have largely been priced into their stocks. The sector is currently trading less than 1 standard deviation below its 10-year average, paying an average dividend yield of 6.7%, and is one of the pillars of Canadian infrastructure. The sector is sound, and we anticipate it turning around once some of the near-to-medium-term uncertainties are laid to rest.

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