BELUS Merger - It's a Wash

When it comes to investing in either Telus Corp. (TU) or BCE Inc. (BCE), RBC Capital Markets analyst Jonathan Allen is now convinced it's a wash.

"Previously we were cautious on BCE shares because of 2009 guidance risk, significant pension drag and near-term competitive weakness," he said in a note to clients following Telus' fourth quarter results announced Friday.

"However, BCE investor day addressed a few concerns and we are now neutral between TELUS and BCE shares."

In comparing the two telecom rivals., Mr. Allen said Telus has a modestly better growth rate and more room to return capital, noting Telus 56% dividend payout versus BCE's 73%. He also said Telus has a modestly stronger competitive position than BCE given Telus' wireless share and wireline strength.

On the other hand, the analyst said TELUS' declining average revenue per user (ARPU) is a concern and that investor confidence in BCE management is improving.

Mr. Allen maintained his "sector perform" rating and C$40 price target on Telus. He continues to rate BCE Inc. "sector perform" as well, with a C$27 price target.

Several other analysts also weighed in on Telus's Q4 results, including UBS' Jeffrey Fan. Mr. Fan's "neutral" rating and C$32 price target is unchanged after he expressed concerns about Telus's high capital spending in relation to its peers.

Mr. Fan said in a research note:

With our projection of 25% wireline capex intensity in 09, it leaves little room for share repurchase and/or dividend growth based on the current target leverage and dividend payout ratio.

We have reduced our buyback and dividend expectations for 2010. We are no longer expecting annual dividend increase later in 09 unless there is a change in the payout policy.

Desjardins Securities analyst Joseph Mackay, also maintained his "hold" rating, "given the slowing economy, the pressure on wireless ARPU, the loss of free cash flow in 2009 related to the payment of cash taxes (C$300 - 350m) and increased capex associated with the buildout opportunities for multiple expansion in the stock price will be limited." Mr. Mackay has a C$36.50 one-year price target.