BCE Inc (TSX:BCE) and Telus (TSX:T) are two of Canada’s most popular and highest-yielding telco stocks. The former has a 7.5% yield, while the latter has a 6.4% yield. Either one of these stocks could add a lot of passive income to your RRSP or TFSA. The question is, are their dividends safe? And which, between the two of them, is the safest?
The answer is not as straightforward as you might think. The standard metric that people use to evaluate dividend safety is the “payout ratio,” which means dividends paid divided by profit earned. It tells you the percentage of profit a company is paying out in dividends. Going by this metric, BCE’s dividend seems like a slam-dunk winner over T’s dividend, as it is both higher yielding and better covered by earnings. However, as we’ll see, there is much more to this story than just the payout ratio, and there are good reasons to consider investing in Telus today.
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The case for BCE Inc
The case for going with BCE instead of Telus as a dividend play rests on two main facts:
- BCE has a higher dividend yield than Telus does.
- It also has the lower payout ratio of the two.
BCE shares cost $51.68 at the time of this writing. They paid $3.87 in dividends over the last 12 months. Should the dividend be maintained at that level, then the yield will be 7.48%. That’s much higher than Telus’ yield. Additionally, BCE’s payout ratio is 116%, which is lower than T’s (136%). So, there’s a case to be made for investing in BCE on the basis of both yield and safety.
The case for Telus
Despite BCE scoring clear wins over Telus on both yield and safety, there is one point that Telus has in its favour:
Recent earnings performance.
In the most recent quarter, Telus delivered:
- $4.9 billion in revenue, up 12.8%.
- $196 million in net income, down 61%.
- $0.19 in earnings per share (“EPS”), down 58%.
- $1.6 billion in EBITDA, up 0.8%.
- $1.7 billion in adjusted EBITDA, up 5%.
- $279 million in free cash flow, up 36%.
Overall, it was not a bad quarter at all, with high double-digit growth in free cash flow.
Now let’s look at the same quarter for BCE:
- $6 billion in revenue, up 3.5%.
- $397 million in net income, down 39%.
- $2.6 billion in EBITDA, up 2%.
- $0.37 in earnings per share, down 43%.
- $1 billion in free cash flow, down 24%.
Although BCE’s earnings decline was slightly less bad than that of Telus, the latter company had much better growth in free cash flow. Both companies’ free cash flow payout ratios are around 45%, so if current trends persist, then Telus will have a lower free cash flow payout ratio next year.
And the winner is…
Taking everything into account, I’m inclined to think that BCE is a better dividend buy than Telus today. It has a higher yield, a lower payout ratio, and is very similar to Telus operationally, meaning that its growth prospects are likely very similar. Although Telus had the better growth in free cash flow last quarter, BCE has similar long-term growth rates, so it looks more compelling on the whole.
