Better Buy? Telus vs BCE Stock

Different industries to invest in

It has been a rough go for Canada’s top telecommunication stocks like TELUS Corp. (TSX:T) and BCE (TSX:BCE). TELUS stock is down 8% year to date while BCE is down 17%. Over the past 52 weeks, TELUS is down 22% and BCE is down 29%.

Both companies have faced externally and internally inflicted issues over the past couples of years. Factors like increased competition, enhanced regulatory scrutiny, and elevated financing expenses have impacted results over the past year and half.

With both stocks down substantially, they each have substantial dividend yields. Dividend investors are likely wondering whether they are a good buy today or not. Here’s some thoughts as to whether TELUS or BCE is a better buy today.

TELUS stock is hanging tough, but has a fair chance of recovery

TELUS stock currently yields 6.9%. The last time it yielded over 5.85% was during the COVID-19 market crash in 2020. At $22 per share, it is only trading a couple of dollars above its COVID-19 low.

TELUS got caught in mid-2023 with an unbalanced cost structure. Likewise, its TELUS International spin-out got caught by a rapid demand decline for its consulting and customer services.

Fortunately, it was quick to make staff and operational cuts. Likewise, the company is very close to the end of an elevated infrastructure spending cycle. It has been working to build out fibre across its entire network.

Its dividend looks sustainable if it hits its outlook

Through a tough market, the telco has maintained market-leading customer growth. This indicates that it is gaining market share. While earnings per share were down 50% in 2023, it grew earnings before interest, taxes, depreciation, and amortization (EBITDA) by 4%. Free cash flow increased by 13% to $1.3 billion.

Currently, T stock’s dividend payout ratio is sitting close to 100% of free cash flow. Fortunately, TELUS expects its capital spend to significantly decline.

While its revenue growth rate is moderating to the low single-digit range, it expects excess cash flow to increase drastically to $2.3 billion in 2024. If it continues its 6-7% annual dividend growth trajectory, its dividend growth should be funded by its spare cash. Â

BCE is between a rock and hard place

While TELUS is facing challenges, it is very likely to maintain and even grow its dividend while delivering modest mid-single digit growth.

The outlook for BCE is not as rosy. It has been slower to adjust to the challenging competitive and economic environment. A decade of investments in media assets has not worked out and it is now a forced seller of assets at the worst possible time.

The company’s outlook recently disappointed shareholders. In 2024, it is only forecasting 0% to 4% revenue growth, sub-5% EBITDA growth, and negative 3% to 11% free cash flow growth. Right now, BCE’s dividend is not funded by free cash flows. In fact, its current payout ratio is sitting at 103%.

If free cash flow is expected to decline, how is it expected to afford its dividend, nonetheless grow it? The company does not have a great buffer given that its net debt-to-EBITDA ratio of four times is at its highest level in 10 years.

BCE is going to have a hard to managing its increased debt burden while also maintaining its elevated dividend. While its 8.6% yield looks attractive, it is very suspect to be cut at some point if it cannot turn its operational and financial picture around.

BCE or TELUS stock?

Given this dynamic, TELUS would be my pick in the telecom space right now. Generally, the telecom sector is likely to be challenged for a while. Investors are likely smart to be patient and wait for a turnaround to start aggressively adding a position.

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Fool contributor Robin Brown has positions in Telus International. The Motley Fool recommends TELUS and Telus International. The Motley Fool has a disclosure policy.