Which of the Big Three telecoms are a good bet as a ‘recession-resistant’ defensive investment?

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Canada’s Big Three telecommunications companies have plenty of appeal as investors look for safety in a challenging environment.

Rogers Communication Inc. RCI-B-T, BCE Inc. BCE-T and Telus Corp. T-T are all recession-resistant, though not recession-proof, with high demand for their utility-like services. Customers need cellphone plans, internet connections and access to streaming services in all seasons.

BCE and Telus pay high dividends, which are rising on a regular basis. And while all three compete with each other, high barriers to entry mean it’s tough for new players to get a foothold.

To these strengths, the companies can now add Canada’s ambitious plan to bring in 500,000 immigrants a year by 2025. It is a powerful energizer that will deliver new customers.

“What is the first thing that newcomers want when they arrive?” asks Daniel Sacke, portfolio manager and senior investment advisor with The Sacke Wealth Advisory Group at BMO Nesbitt Burns Inc. in Toronto. “Internet and a cell phone.”

Mr. Sacke holds Telus and BCE in client portfolios, favouring Telus for its entrepreneurial bent, higher growth rate than BCE and commitment to dividend increases. Telus announced a 7.2 per cent year-over-year dividend increase in November, its 23rd increase since it started a multi-year dividend growth program in 2011.

Mr. Sacke believes if the economy slips into recession, telecom companies have the added appeal of offering inexpensive forms of entertainment such as streaming movies, TV programs, and gaming.

“We look at these companies as a defensive investment, as staples really,” he says. “You can argue that when times get tough, people are even more dependent on their phones and internet connections.”

Matthew Dolgin, equity analyst with Morningstar Research Services LLC in Chicago, also believes these companies are solid and recession-resistant businesses.

Mr. Dolgin favours BCE over Telus because BCE is a purer telecom play. Telus is investing in non-telecom businesses and while they have a lot of potential, they’re still unproven, Mr. Dolgin says.

These businesses include Telus International Inc. TIXT-T, which was spun off in 2021. It helps companies including Fitbit and Uber Technologies Inc. moderate online content via things such as customer service chatbots. Telus Agriculture & Consumer Goods and Telus Health are both expected to go the same route.

“There’s a little bit of faith that [Telus} can use its [artificial intelligence] and telecom base to help propel these other businesses,” he says. “It’s invested a lot in them and need them to succeed for their valuations to be worthwhile.”

Mr. Dolgin also sees Canada’s immigration targets as an energizer. Telus added 150,000 new customers in its latest quarter. It was the best performance since the third quarter of 2010. BCE’s net mobile subscriber additions were also a quarterly record.

In his earnings conference call, Rogers chief executive officer Tony Staffieri named immigration as one of three areas of mobile strength. The others were people returning to the office post-pandemic and resuming travel. In his call, BCE CEO Mirko Bibic also pointed to immigration.

Other influences on performance include higher roaming revenue as people resume travel for business and pleasure. More customers are buying 5G-enabled phones, which tends to lead to higher average spending.

Mr. Bibic pointed to the payoff from capital investment upgrades that are enabling 5G networks. Only 35 per cent of subscribers have 5G devices, he said, “so there’s a lot of room for growth.”

Mr. Dolgin favours Rogers as the most undervalued stock of the three in part because of the various dramas over the past year that have made headlines. These include the boardroom fight for control of the company, the network outage in July and the ongoing takeover battle for Shaw Communications Inc. While these factors don’t affect operating performance, they have depressed Rogers’ share price and this offers an opportunity for investment, he says.

Mr. Sacke considers Bell and Telus as portfolio anchors paying high dividends while offering steady growth. Mr. Dolgin sees potential for a 10- to 15-per-cent increase in their share price in the coming year.

Mr. Sacke says in a high-interest rate environment, their dividends have a lot of appeal when compared to fixed-income options. The dividend tax credit means an Ontario resident in the highest tax bracket will pay 39 per cent on dividend income versus 53.5 per cent on interest earned from a fixed-income investment.

“They give you a nice mix of dividend income and growth and that’s what you want in this environment,” he says.

In the end, it comes down to a preference.

“Each of these companies are great,” Mr. Dolgin says. “And whenever the market presents an opportunity for any of them, they’re worthy buys.”

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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