Sector Analysis: Canadian Telecom

Remember when the Canadian telecom sector enjoyed the highest wireless prices on the planet, steady growth from immigration, and an overall landscape that looked pretty much bulletproof?

Pepperidge Farms remembers.

For today’s edition of the newsletter I thought we’d do a deep dive into the sector, analyzing how it has changed in the last few years, how these changes impact the players involved, and what comes next for at least one dividend I bet y’all are curious about.

This is the first of a series of sector analysis that we’ll do as the year goes on. Look for one every six weeks or so — including ones that cover Canadian banks, retailers, REITs, utilities, and more.

Let’s get started.

The 2010-20 period was a great decade for Canadian telecom stocks.

The Big 3 (Rogers, BCE, Telus) dominated the industry. Various upstarts would show up on the wireless side, act like a yappy dog for a little while, gain a tiny bit of market share, and then inevitably get bought out. The Big 3 looked pretty much unstoppable.

In 2013, Verizon was rumoured to be considering a big splash into the Canadian market, which would be through the purchase of Wind Mobile. The Canadian government desperately wanted a fourth wireless player in the country, and knew Verizon had the financial might to make such a thing possible. But the deal was never even attempted; Verizon saw the environment up here and retreated with its proverbial tail between its legs.

Waiting ended up being a good move for Wind shareholders, FWIW. It was purchased by Shaw Communications just a couple of years later for $1.6B, far higher than the $700M price reportedly discussed with Verizon.

Shaw steadily grew Wind (later rebranded as Freedom Mobile) in the latter half of the 2010s, but not really at the expense of any competitors. The entire sector grew as more folks were getting cell phones. Employers started giving them out, so a lot of people had two devices. Older Canadians gave in and got one. Immigration was steadily making the entire pie bigger, too. And ARPUs (average revenue per user) increased as voice and text-only plans were augmented by data.

By the end of the decade, pretty much everybody had a data-sucking smartphone, and $50 per month was a cheap plan. Earnings were good, growth was predictable, and dividend growth followed.

The pandemic made things even better, at least at first. Interest rates plummeted to basically zero, so telecoms could refinance debt at cheaper rates. People working from home needed fast internet, and so many upgraded their plans. And after a slight pause, immigration actually ramped up. Pretty much every new Canadian ended up with a smartphone.

But then, things changed. First interest rates went up, and investors started to worry about interest costs and the ability to rollover debt at reasonable rates. It didn’t help that many interest-sensitive sectors (telecom included) went with a lot of variable rate debt to save costs.

Then a big acquisition happened, which quietly changed everything. After being rebuffed in its attempt to buy Cogeco, Rogers pivoted and acquired Shaw Communications. The deal was announced in early-2021, but didn’t close until early-2023. The Competition Bureau ended up approving the deal, but not until Rogers sold Shaw’s wireless assets. That was completed in 2023 with the sale of Freedom Mobile to Quebecor for $2.85B.

There were a few conditions to this sale. Quebecor would have to offer cheap mobile plans to Canadians, which the company was happy to do. After all, that’s how it gained market share in Quebec. It also signed a long-term deal with Rogers to get access to its network, which would give it true nationwide coverage for the first time. Quebecor also pledged not to sell any of its spectrum for at least a decade, an easy choice for a company looking to expand.

In short, the government made sure Quebecor was serious about lowering wireless plans across the country before approving the sale. Once the deal was approved and it officially took over Freedom, Quebecor aggressively cut prices and went after the Big 3 incumbents.

It’s been a winning strategy for both the company and Canadian consumers in general. Incumbents were forced to match in order to avoid losing customers and then offer great deals in order to entice them to switch. A full-scale price war broke out, with thousands of Canadians taking advantage to save some serious money on their wireless bills.

This, combined with the steady decline in the price of data, means that the typical wireless bill has fallen significantly in the last five years. And that’s amid strong inflation in almost every other part of the economy.

The incumbents were also attacked on the wireline side. CRTC expanded wholesale fiber access in 2023-25, which allowed third-party resellers the ability to access networks in cities where they don’t actually have a physical presence. The program originally started in Ontario and Quebec, but was expanded across the country once it proved successful in bringing bills down. Your author currently gets his internet from one of these resellers for easily 40% cheaper than the comparable plan from Rogers or Telus (the only wireline options in Edmonton).

Put it all together, and it’s pretty obvious why the top telecom shares have suffered so much over the last few years. The business has clearly gotten worse. Companies are regularly offering flash sales to get new customers, including one last week where new customers can get a 80gb of data (good in Canada, the U.S., and Mexico) for just $25 per month. Those deals were unheard of just five years ago.

As you can imagine shares have taken this all on the chin. Three year total returns for the largest telecoms are:

Next let’s take a closer look at each company individually, starting with the one that elicits strong emotions from just about everybody, BCE.

BCE (TSX:BCE)(NYSE:BCE) famously cut its dividend last year amid a struggling telecom market, a high debt load, and uncertainty surrounding its Ziply acquisition in the United States.

I was formerly long the stock, but sold when the company officially abandoned its debt repayment plan to acquire Ziply. I thought it was a bad acquisition; especially considering Ziply’s plan to continue replacing its copper network with fiber. That’s a decent long-term strategy, I just didn’t like the unknown price tag to pay for it all.

It’s now close to 18 months later and while we have a better idea what the Ziply network replacement is going to cost, what makes me nervous is the state of the U.S. wireline market today. Most areas in Ziply’s territory are suffering from strong competition, which has created a bit of a price war. U.S. telecoms are reporting weakness pretty much across the board.

That, combined with continued weakness here in Canada and a balance sheet that doesn’t really inspire confidence, makes BCE a stock I’m not super interested in owning again. It does have some things going for it — like a 5% dividend yield and a cheap valuation of about 13x forward earnings — but overall there’s just a little too much uncertainty for me. I prefer others in the sector.

Rogers (TSX:RCI.B)(NYSE:RCI) is an interesting company after the Shaw acquisition.

It is still Canada’s largest wireless provider, but it doesn’t seem super interested in wireless any longer. It is more concerned with its wireline business, as well as acquiring sports teams.

Remember, Rogers is the owner of the Blue Jays, and it previously owned 37.5% of Maple Leaf Sports and Entertainment (MLSE) with BCE. BCE sold its chunk to Rogers, giving it a 75% ownership stake. It’s long been rumoured that Rogers is looking to buy the remaining 25% stake from the Tannenbaum family and then float its own Canadian sports teams IPO. This would include both MLSE and the Blue Jays.

The problem with owning sports teams from a dividend investor’s perspective is that they don’t really produce a lot of cash flow. Cash flows that are generated are reinvested back into making the stadium nicer or better players, rather than given back to shareholders. As a Blue Jays fan I like that (flags fly forever, baby), but as an investor, I don’t. The wireline assets do gush cash, but the company seems more interested in using those earnings to pay down debt, rather than increase dividends.

Rogers still pays a generous $2 per share annual dividend, which is good enough for about a 4% yield as I write this. The stock also trades for about 9x FCF, which is impressive for a company who has a big chunk of its equity invested in assets that don’t deliver much FCF. But this really isn’t a dividend growth name, so it’s easy for me to pass.

Both Cogeco (TSX:CGO) and Cogeco Communications (TSX:CCA) are essentially the same company — one owns the telecom assets (Communications) while the other owns Communications shares along with a few radio stations. We’ll use Communications shares here mostly, since they’re easier to analyze than the holding company.

Cogeco owns wireline telecom assets in small-to-medium sized cities in Ontario and Quebec, along with a few different U.S. states. It has recently launched wireless services in most of its markets, too.

The wireline assets have been struggling a bit lately. Especially in the United States. The same competitive pressures that are impacting other U.S. telecoms are hitting Cogeco too, and it doesn’t really have the financial might to win price wars against companies that are 10x bigger. So revenues are slowly falling.

But cash flows remain strong. Communications earned $541M in free cash flow in fiscal 2025, with analysts expecting a similar number this year. That works out to nearly $13 per share, versus a share price of just over $70 as I write this. Shares are damned cheap.

Plus, Cogeco is serious about dividend growth. The company has a 15+ year streak of dividend growth behind it. The current payout is 5.6%, and that comes with a payout ratio of around 30% of FCF. It’s truly rare to get that combination of yield, growth, and low payout ratio.

That chart is a thing of beauty. Love it.

Cogeco then uses the rest of its cash flow to pay down debt, expand the business, and repurchase shares. There are 13% fewer Communications shares outstanding since 2020, a trend we always like to see.

This is one I continue to like, and I have a position. I’d buy more but there are other companies I like better today. Maybe when it gets a little cheaper.

I won’t bury the lede here. Quebecor (TSX:QBR.B) is easily my favourite Canadian telecom today.

The main reason is the growth potential. Quebecor continues to take market share from the incumbents on the wireless side, and it’s much easier for them to grow as the low-cost operator. As long as networks are comparable — and they are — folks will always gravitate to the low cost option. Who doesn’t like saving money on what is increasingly looking to be a commodity business?

Freedom is also winning over the folks who travel. Gone are the days when you’d go to a foreign country and do without data for a couple weeks. Freedom offers affordable plans that give customers data in dozens of different countries, all without the hassle of having to acquire and install an e-sim.

These plans are cheap enough that even folks who only travel 1-2 times a year are interested.

Quebecor also has a much better balance sheet than most of its competitors. Its trailing debt-to-EBITDA ratio is around 3x. Its peers — except Cogeco, its balance sheet is almost as good — have work to do in order to get their debt down to that 3x EBITDA target.

Quebecor also sports a history of dividend growth and a low payout ratio to encourage dividend growth in the future. The current dividend is $0.40 per share each quarter, or $1.60 annually. That works out to about $250M per year in dividends. Meanwhile, free cash flow has surpassed $1B annually each of the last two years. That’s a payout ratio of around 25%, which is excellent.

After years of being the first choice in the sector for a lot of dividend growth investors, Telus is struggling.

There are a few things wrong. Firstly, the company has too much debt. It is focused on trying to repay some of its creditors by selling off some non-core assets, and it should have some success there. It has already monetized a 49% stake in its cell towers. Next up should be selling off a lot of its old real estate, as well as at least a minority position in Telus Health.

The real estate is the big one. It is worth somewhere in the $2B to $3B range, and a lot of it consists of buildings used to power the old copper networks. They aren’t needed any longer with fiber, plus they’re not encumbered with large amounts of debt. Some of these buildings are used today, but they can always be rented back.

The other big issue with Telus is the dividend. Telus’s payout ratio has been above 100% of its free cash flow for years now. The company kept hiking its dividend through it all, comforted by the fact that so many investors took their dividends in the form of new shares. That kept the cash payout ratio comfortably under 100%, but created a future problem. All those future shares came with a dividend obligation.

If Telus can get its debt under control and grow free cash flow at the same time, the dividend could be maintained at the current level. But if it stumbles, the payout would likely be cut. I give it about a 60/40 chance today in favour of a cut.

The other factor is the new incoming CEO. Victor Dodig turned around CIBC before retiring in 2023. He’s unretiring in June to take over the top job at Telus. Folks are speculating the first thing he’ll do as the new CEO is slash the dividend. I think he’ll take a more wait and see approach, with the timing of a dividend cut pushed to 2027. He’ll want time to see if the debt reduction plan is working.

I own Telus shares, and I’m not selling even though I think a dividend cut is very possible. This is a company that still gushes cash, that has a lot of interesting non-telecom assets, and that is trading at the lowest price-to-FCF multiple in years. It’s cheap, unloved, and even a 50% dividend cut is still a generous payout. I think there’s recovery potential here, and I want to stick around for that.

The Canadian telecom sector is definitely weaker than it was a few years ago. Especially for the members of the Big 3.

There’s a full-scale price war going on in wireless. Internet resellers are damaging the wireline business. Balance sheets generally aren’t in great shape. And immigration has pretty much stopped, which takes away pretty much the only source of growth. Incumbents are basically fighting for the same pool of business. It’s not getting any bigger, at least in the short-term.

But, at the same time, there are reasons to be optimistic. The big one is valuation. Shares of most telecoms are trading at just over 10x FCF, which represents nice value as long as cash flows don’t evaporate. Dividends are also strong, and even if Telus does end up slashing its payout it should still pay a decent yield.

Ultimately, I like buying sectors when they’re down. I want to maximize my dividend income while also setting myself up for dividend growth. I’m also looking for a little multiple expansion as the sector gets back in favour. So I’d be inclined to look at telecom today, although perhaps at other players than the Big 3.