Published July 31st, 2015
Canada has a population of over 35 million. The wireless telecommunications industry in Canada is similar to that in the United States. The difference is the Canadian wireless telecommunications industry is smaller by a factor of about 10 – due to the differences in population between the two countries.
Two large players dominate the United States wireless telecommunications industry: Verizon (VZ) and AT&T (T). Each company has greater than 30% market share. T-Mobile (TMUS) and Sprint (S) combine with Verizon & AT&T to control around 90% of the United States telecommunications market.
Characteristics of the Wireless Telecommunications Industry
Oligopolistic markets are good for investors – but bad for consumers. Reduced competition means the few businesses in the wireless telecommunications market can charge higher prices (or have better contracts and worse customer service) than what we would see in a truly competitive market. Click here to learn how to reap oligopoly profits with AT&T.
The telecommunications market is prone to having a small amount of competitors due to 2 primary reasons. The first is high upfront costs. It takes billions of dollars to set up a reliable wireless network. Secondly, strict government regulation makes it more difficult for new entrants to compete in the telecommunications market. The last FCC wireless spectrum auction in the United States raked in $44.9 billion for the government. AT&T spent $18.2 billion in the auction, and Verizon spent ‘just’ $10.4 billion.
The Canadian Wireless Telecommunications Industry
Canada’s wireless telecommunications market is even more concentrated than the United States’ market. Just 3 companies make up about 90% of the wireless telecommunications market in Canada – TELUS (TU), Rogers Communications (RCI), and Bell Canada – now known as BCE (BCE). All three of these businesses have around 30% market share in the Canadian wireless telecommunications industry.
The dividend yield of each of these 3 Canadian wireless oligopoly companies is listed below:
- TELUS has a 4.0% dividend yield
- Rogers Communications has a 4.5% dividend yield
- BCE has a 5.2% dividend yield
In addition to having the highest yield, BCE is also the most diversified and largest of these 3 businesses. The market cap of each is listed below:
- Rogers Communications has a market cap of $18.1 billion
- TELUS has a market cap of $20.7 billion
- BCE has a market cap of $34.6 billion
BCE Leads the Pack
In addition to being one of the top 3 wireless providers in Canada, BCE is also Canada’s largest internet provider.
BCE is also Canada’s second largest television provider. The company expects to be the largest television provider in Canada by year-end.
Safety, Balance Sheet, & Recessions
BCE locks its customers into long-term contracts for ‘essential’ service including wireless, internet, and television.
The company also encourages customers to ‘bundle’ their services together. This creates switching costs which further lock customers in to staying with BCE.
BCE’s contracts and bundling of near-utility services gives the company stable earnings and dividend growth. The company is a Canadian Dividend All-Star and has paid steady or increasing dividends for 32 consecutive years (excluding the effects of spin-offs).
Not surprisingly, BCE performed well during the Great Recession of 2007 to 2009. The company saw earnings-per-share decline 21% during the worst of the Great Recession, but quickly recovered the next year.
Telecommunications companies tend to hold high levels of debt. They can manage this due to the stability of their earnings. BCE is no exception. The company has $18.3 billion in total debt. In addition, the company has $2.3 billion in unfunded pension liabilities for a total debt load of $20.5 billion.
Despite its high debt load, BCE is in no danger of bankruptcy risk. The company has an interest coverage ratio of over 4. With earnings-per-share falling just 21% during the Great Recession, it is very unlikely the company sees earnings declines of over 75% – which is what it would take to put the company at risk of default.
Recent Growth & Expected Total Returns
Investors can expect strong total returns from BCE going forward. The company posted 3.7% adjusted earnings-per-share growth in its most recent quarter.
The wireless segment is growing fastest for BCE. Wireless sales increased 9.7% in the company’s most recent quarter.
BCE recently closed its acquisition of GLENTEL. GLENTEL is a Canadian mobile products distributor. The acquisition gives BCE a larger store footprint across Canada. BCE acquired 50% of GLENTEL, with ‘rival’ (rivals don’t often work this closely together – but this is an oligopolistic market, after all) Rogers Communications.
Over the last decade, BCE has compounded earnings-per-share at 8.0% a year. The company’s growth is expected to slow somewhat going forward, however.
Management is expecting earnings-per-share growth of 4.7% in fiscal 2015. Over the long-run, I expect earnings-per-share growth to be between 4% and 6% a year.
This growth combined with the company’s 5%+ dividend yield gives investors solid expected total returns of 9% to 11% a year.
Valuation & Final Thoughts
BCE currently trades for a price-to-earnings ratio (using adjusted earnings) of just 12.9. The company’s low valuation combined with its high dividend yield, solid expected total returns, and stability make it a favorite of The 8 Rules of Dividend Investing.
BCE operates in industries with few competitors. The company benefits from lower-than-average competition with stable and consistently (but slowly) growing earnings. BCE should appeal to dividend investors looking for high yield and above average total returns.