The Big 3 Telecom Companies

For investors greater profitability makes wireless players more attractive investment prospects

Vikram Barhat 24 March, 2021 | 1:57AM
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Rogers Building

The recent news about the merger between Canadian telecom giant Rogers Communications and its Calgary-based rival Shaw Communications created ripples and raised eyebrows. Consumers advocacy groups wasted no time in bringing up the issue of prevention of competition. However, a Morningstar report says the regulators don’t have a strong case to block the $26 billion deal.

Over the years, the Canadian wireless landscape has shrunk, as larger players gobbled up smaller rivals -- Rogers bought Fido, Shaw swallowed Wind, and Bell purchased Manitoba Telecom Services. This resulted in an oligopoly comprising Rogers, BCE and Telus, known as the Big Three.

Against that backdrop, consumer watchdogs have expressed concern over constrained competition leading to some of the most expensive plans in the world and reduced choice for Canadian consumers. The proposed merger, which is subject to multiple regulatory approvals, will create Canada’s second biggest cellular and cable operator, leapfrogging Telus, the current number 2 operator.

For investors, though, greater profitability makes wireless players more attractive investment prospects. These leading Canadian operators control 90% of the domestic wireless market and boast strong fundamentals that positions them well to benefit from secular trends including 5G rollout, subscriber growth, remote working, and industry consolidation.


BCE Inc

 

Ticker

BCE

 

Current yield:

6.18%

 

Forward P/E:

17.86

 

Price

$56.85

 

Fair value:

$65

 

Value

13% discount

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

****

Data as of Mar 19, 2021


Leading Canadian wireless and internet service provider, BCE (BCE) is one of the big three national wireless carriers, with roughly 10 million customers. The operator also offers broadband, television, and landline phone services across Canada. Additionally, it has a media segment comprising television, radio, and digital media assets.

BCE is also the biggest Canadian broadband provider with over 3.7 million high-speed Internet customers at the end of 2020 and a footprint that reaches three fourths of the nation’s population. The legacy telecom operator has a formidable media business which offers, among other services, OTT on-demand service with content including HBO and Showtime. “BCE also distinguishes itself from competitors with a high-quality and diversified media unit (Rogers is the only other Canadian telecom firm with media exposure, and we think BCE’s has superior assets),” says Morningstar equity analyst, Matthew Dolgin, who puts the stock’s fair value at $65.

BCE's two biggest segments, wireline and wireless (collectively about 85% of total revenue), underpin Dolgin’s forecast for 4% average annual revenue growth through 2025. “We expect faster growth in 2021 and 2022 as the firm rebounds from the pandemic,” he adds.  

Rogers Communications Inc Class B

 

Ticker

RCI.B

 

Current yield:

3.26%

 

Forward P/E:

16.39

 

Price

$61.26

 

Fair value:

$66

 

Value

Fairly valued

 

Moat

Narrow

 

Moat Trend

Negative

 

Star rating

***

Data as of Mar 19, 2021


With more than 10 million subscribers, equating to one third of the total Canadian market, Rogers (RCI.B) is the largest wireless service provider in Canada. Wireless accounted for over 60% of the company’s total sales in 2020. The cable segment provides about one fourth of total sales and comprises home Internet, television, and landline phone services. The telecom giant’s media segment includes several television and radio stations and the Toronto Blue Jays.

Rogers operates in an oligopolistic market structure which creates “solid moats that protect them from any current or future competition,” says a Morningstar equity report. More recently, Rogers Communications sought to acquire rival Shaw Communications in a $26 billion deal expected to close in early 2022. “We believe approval is more likely than not,” the report says, arguing that “this deal would benefit each of the big three national wireless providers,” as an improved market structure is a positive for all participants.

Rogers procured 80% of the available spectrum at the 2019 auction, which facilitated coverage in every province. The enhanced network in conjunction with a transition to unlimited data plans, a growing industry trend, “will result in churn declining, pricing power increasing, and margins expanding,” asserts Dolgin, who recently upped the stock’s fair value from $65 to $66. 

TELUS Corp 

 

Ticker

T

 

Current yield:

4.76%

 

Forward P/E:

23.26

 

Price

$26.17

 

Fair value:

$29

 

Value

Fairly valued

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

***

Data as of Mar 19, 2021


Telus
(T) is one of the big three wireless service providers in Canada, with 9 million mobile phone subscribers nationwide. It also provides internet, television, and landline phone services in the Western Canada, and has a small wireline presence in eastern Quebec.

The company has been pushing to bring fiber to the home over most of its wireline footprint to compete on more equal footing with its rivals. Telus benefits from efficient scale and cost advantages in its wireless segment and efficient scale in its wireline segment. Each segment accounted for about 50% of total revenue in 2020. “Wireline is where Telus has its biggest edge over its competitors,” says a Morningstar equity report, stressing that the operator has investment considerably over the last several years to “improve its wireline network with its fiber-to-the-premises buildout.”

As a result, Telus now passes roughly 80% of its high-speed internet footprint with fiber, which positions Telus for a sustained period of success. “In the years since the fiber buildout began, Telus has already taken significant market share from Shaw, its primary competitor in the western Canadian geographies,” says Dolgin, who pegs the stock’s fair value at $29.

 

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
BCE Inc63.74 CAD0.58Rating
Rogers Communications Inc Class B63.13 CAD1.40Rating
Shaw Communications Inc Class B38.23 CAD0.76Rating
TELUS Corp28.85 CAD0.94Rating

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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