Better Buy: TELUS Stock or Rogers Communications?

For a better margin of safety in the dividend and stock valuation, Rogers Communications is a better buy today.

Kay Ng ❯

Kay began investing in dividend stocks around 2008 via the concept of value investing. Since then, she has expanded into growth investing, including in small caps. Her passion for investing has only grown over the years! After graduating from UBC with a BSc in Computer Science, she took university courses in financial markets, finance, and financial accounting. She has contributed her works to Motley Fool, Sure Dividend, and Seeking Alpha.

Published August 21, 2023 2:15 pm EDT

TELUS (TSX:T) and Rogers Communications (TSX:RCI.B) are two of the big Canadian telecoms that investors rely on for dividend income. Let’s compare them to see which may be a better buy today.

Business overview

Last year, TELUS generated revenues from 9.69 million mobile phone subscribers (up 4.3% year over year), 2.47 million connected device subscribers (up 16%), 2.41 million internet subscribers (up 6.2%), 1.33 million TV subscribers (up 4.7%), and 978 thousand security subscribers (up 22%). That year, its health services revenue rose 75% to $913 million.

In total, it generated $18.3 billion in operating revenues in 2022 (up 8.6% year over year). It also reported net income of $1.7 billion (up 1.2%) and adjusted EBITDA, a cash flow proxy, of $6.6 billion (up 9.5%).

Rogers Communications generates wireless, cable, and media revenues. The 2022 revenue mix was about 59%, 26%, and 15%, respectively. In total, its 2022 revenue increased by 5% to $15.4 billion, of which 86% was service revenue. Adjusted EBITDA rose 6% to $6.4 billion. And net income climbed 8% to $1.68 billion.

Dividend

TELUS stock has increased its dividend for about 19 consecutive years with a 10-year dividend-growth rate of 8.3%. Currently, TELUS offers a dividend yield of about 6.4%. Management targets to increase its dividend by 7-10% per year through 2025. Sure enough, its trailing 12-month dividend growth was about 7.3%. Investors should note that it aims for a payout ratio of 60-75% of free cash flow.

Rogers Communications stock has the ability to but chooses not to increase its dividend every year. So, it offers a dividend yield of about 3.7%, which is a fraction of TELUS stock’s yield. Rogers’s payout ratio is estimated to be about 47% of its adjusted earnings and 46% of its free cash flow this year. So, Rogers’s dividend appears to be safer.

Past returns

Despite the correction of approximately 30% from its peak in 2022, TELUS stock has still delivered total returns of about 8.4% per year in the last decade. In the same period, Rogers Communications stock delivered total returns of roughly 6.2%.

Which is a better buy?

TELUS’s latest 2023 guidance includes operating revenue growth of 9.5-11.5%, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) growth of 7-8%, and free cash flow of approximately $1.5 billion. Based on this free cash flow estimation and the dividends paid in the last quarter, its forward payout ratio would be about 85%. So, the company might have to reduce its dividend growth guidance, unless it expects its free cash flow to pop up meaningfully in 2024 — potentially from reduced capital investments. At $22.83 per share, analysts believe the undervalued stock trades at a discount of approximately 20%.

Rogers’s latest 2023 guidance includes service revenue growth of 26-30%, adjusted EBITDA growth of 33-36%, and free cash flow of $2.2-$2.5 billion. At $53.55 per share, analysts believe the dividend stock is discounted by about 28%. Although Rogers offers a smaller dividend yield, its lower valuation could drive higher returns over the next three to five years. So, investors should consider buying shares in Rogers Communications first.