Analysts Weigh in on BCE vs. Telus

BCE Inc. or Telus Corp. (TU)? For UBS analyst Jeffrey Fan, the choice is clear.

"We recognize that BCE still has to tackle many operational issues," he said in a note to clients. "However, given the current valuation, we prefer BCE over Telus."

Mr. Fan said that in 2009 and 2010, BCE and Telus will show similar EBITDA numbers of flat to low single digit growth. But BCE will generate far better free cash flow levels than Telus, he added, forecasting a free cash flow margin for BCE of 13% versus approximately 7% for Telus.

"Even if we assume BCE will invest in wireline capex at the same intensity as TELUS, BCE's FCF valuation would still be more attractive," the analyst said.

Mr. Fan upgraded his recommendation on BCE from "neutral" to "buy" and left his price target of C$25.50 unchanged. Mr. Fan downgraded Telus to "neutral."

RBC Capital Market analyst Jonathan Allen is also clear in his choice, but for him, the better investment choice is Telus.

He said Telus will have positive EBITDA growth while BCE's growth will fall 2% to 4%. He also noted that BCE's dividend payout is higher than 70%, leaving it with less room to grow than Telus whose payout is 50%.

Mr. Allen added that BCE may face "transition risk" following the recent privatization failure and is also saddled with a larger pension shortfall and solvency funding obligation.