BCE (TSX:BCE)(NYSE:BCE) and Telus (TSX:T)(NYSE:TU) are seen as the untouchable dividend plays.
Canadian retirees get the right dose of dividends and dividend growth from both firms that have thrived over the last decade thanks in part to the Canadian telecom scene — a scene that’s hasn’t been that competitive when compared to that of the U.S. telecom scene.
One could argue that the past environment has been good to Canada’s Big Two telecoms — too good, in fact. The lack of competition and rock-bottom borrowing costs were huge tailwinds that allowed each firm to deliver fat economic profits into the pockets of investors. Looking ahead to the next 10 years, I can’t say that I’m nearly as optimistic about the upcoming environment for the big telecom incumbents.
Borrowing costs are trending higher, competition is getting fiercer, and new tech will require the Big Two incumbents to spend money hand over fist just to keep up with the times.
Heavy spending in new telecom tech just to remain competitive
Sure, shiny new 5G infrastructure and Fibre-to-home will command higher prices initially, but as the market becomes saturated and the excitement of next-gen telecom tech fades, we’ll likely see prices (and margins) remain static or even lower in spite of the massive amounts of capex that’ll be mandatory for both BCE and Telus just to remain competitive.
It’s the “keeping up with the Jones'” effect.
Once BCE gets 5G and Fibre in a neighbourhood, other telecoms will follow suit and try to poach subscribers in the area through price undercutting, subscriber poaching, and aggressive promos. To make matters worse, federal regulators will be playing favourites with smaller up-and-coming competitors and placing hurdles in front of the incumbents.
I don’t know about you, but “keeping up with the Jones'” doesn’t seem like a very good model for market-crushing total returns over the long haul.
The Huawei problem
To make matters worse, the 5G bill for BCE and Telus could become a heck of a lot larger should the federal government decide to place a ban on Huawei’s 5G equipment. The Globe and Mail noted that an anonymous telecom exec pinned that such a ban would cost up to $1 billion for Telus and “hundreds of millions of dollars” for BCE.
As time wears on and both firms continue spending on Huawei’s 5G gear, we could see the bill swell further should Huawei infrastructure get a nationwide ban. Of course, we’ve heard many pundits downplaying the whole situation, and although the ban will only shave off a small percentage of BCE or Telus stock, the reputation of both firms could take a hit as Canadians learn more about the risks that come with integrating Huawei’s tech.
More recently, British firm Vodafone reportedly reported to Bloomberg that it had found hidden back doors in Huawei equipment back in 2011 and 2012. Although the issues have since been resolved, such a headline is not good news for many Canadians who believe Huawei’s equipment may be used as a means of spying.
The U.S. has been encouraging Canada to ban Huawei equipment for quite some time now. Both Telus and BCE have been lobbying against such a ban, but if I had to guess, I’d say that a Huawei ban is looking more likely than not, especially after the arrest of Huawei CFO Meng Wanzhou over the alleged theft of trade secrets.
In any case, I think investors would be wise to lower their expectations when it comes to BCE and Telus. The former, I believe, is a strong sell at nearly 20 times trailing earnings — a multiple I find ridiculous.
Stay hungry. Stay Foolish.
