Since 2009, two Canadian sectors had proven to the world the Canadian market can provide strong dividend growth stocks. It’s not by luck that four out of the ten Best Canadian Dividend Stocks for the Next Decade come from these two sectors.
Both sectors are quite similar on many fronts. They both oligopolies, this is a mature market, but natural growth is still available and federal laws protect them from other competitors (mind you, it has become less protected for telecoms in recent years). In my opinion, they are the backbone of dividend stocks in Canada, and all dividend portfolios should contain at least one of these companies.
However, not everybody thinks the same way. Many investors believe the growth potential for both banks and telecoms is gone for the years to come. Let’s take a dive into both dividend worlds and see if there is still potential for a new buy.
Besides Rogers (NYSE:RCI), the other three telecoms beat the S&P TSX60 over the past five years. Here, I’m not counting the dividend, so you can add a good 4%-5% in yield per year to each of them. This is also a lot more than what the TSX60 pays. Rogers has been struggling for about a year now, but it was ahead of the index for almost the entire period.
There have been many fears from investors with regards to the obvious government desire of enabling foreign competitors to enter into the Canadian mobile market. All telecoms dropped like a rock after the possibility of Verizon (NYSE:VZ) joining the market during the summer of 2013. Fortunately for Telus (NYSE:TU) and company, Verizon preferred buying back its shares from Vodafone (NASDAQ:VOD) than entering a new market. Since then, we all know it’s only a matter of time before another big player enters the market and puts additional pressure on margins. This could be good for consumers, but a lot less for telecom investors.
BCE (NYSE:BCE) recently decided to buy Bell Aliant (BA), its sister company. BA is a money-making machine that will support BCE’s dividend growth over time. Bell’s diversification strategy among TV & entertainment (they also bought Astral not so long ago) can help them face any potential competitors in the mobile industry. BCE recently invested $600M in customer service to compete with Telus and Rogers. It seems to have paid off since their customer service surveys are going up. TV services (Fibe) and their media segments continue to go well, with the integration of Astral Media posting operating revenue growth of 40.7% in this segment. BCE is undervalued compared to Telus. With a dividend yield around 5%, this could be your chance to add a strong blue chip to your portfolio. BCE is a BUY.
Telus seems to be the super-powered dividend stock we all look for. Revenues, earnings and dividend payouts are up -- what more do you want? Strong from a 5% revenue jump and an 8.9% EPS surge, Telus decided to keep its good habit of increasing its dividend as the next payout will be 11.8% bigger. Both wireless and wireline segments were very strong during this quarter. Telus recently announced a $1.3B investment in infrastructure in Quebec. Strong from its position in Western Canada, Telus is now attacking both Ontario and Quebec battling with Rogers, Bell and Quebecor. TU is a BUY.
Rogers was once able to follow the highly competitive telecommunication train in Canada but it seems to lag behind Telus and Bell of late. After posting disappointing results during the entire year in 2013, Rogers is keeping this bad habit for the first quarter of the year with a drop in revenues by 2% and missing analysts’ expectations on both earnings and revenue targets. Analysts are worried about its high debt-to-equity ratio (2.997 vs. Telus at 0.98, for example). An aggressive stock buyback program combined with an increasing dividend payout will continue to erode Rogers’ cash flow. Telus is also hitting Rogers’ markets very hard. If I had to buy a telecom in Canada, I would turn around to buy Telus instead of Rogers.
There are two main fears around the Canadian banks and they are closely related: the high concentration of many banks in the mortgage industry combined with the ridiculous debt level of the Canadian population. There are several overheating housing markets in major Canadian cities and we all agree Canadians can’t sustain a 165% debt level forever. This is another reason why the Bank of Canada is highly reluctant to increase interest rates and prefers to increase borrowing rules to limit access to properties.
Nonetheless, I believe some banks have more options than others, and I still believe there is growth for them.
National Bank (OTCPK:NTIOF) is the smallest Canadian bank but shows very interesting growth potential. First, 38% of its revenues come from its market segment (e.g., trading). As long as we are in a bull market, NTIOF can take advantage of this concentration. Since I believe we are in a long-term bull run, this bank will definitely continue to show growth. It also aggressively acquires clientele in the private wealth management segment. This is also another growth generator for this company. NTIOF is probably the bank that is the least affected by the overheating housing market. NTIOF is a BUY.
TD Bank (NYSE:TD) has shown the strongest growth across Canadian banks for the past ten years (NTIOF is very close, but TD is a lot bigger). On top of being a leader in Canada, TD is also the most productive Canadian bank (e.g., more earnings relative to its risk-weighted assets). Its earnings volatility is lower than its peers due to a smaller exposition to capital markets. Finally, TD has deployed a very lean structure into its branches, which benefits greatly fromits expansion in Quebec and the US. TD Bank it is now known as “America’s Most Convenient Bank.” It recently beat analysts’ estimates once again. Its lean structure gives it one of the best customer service SCOREs across Canada. TD is a BUY.
Royal Bank (NYSE:RY) is another bank that did very well in the US. Since 2008, it has benefitted from the crisis to grow outside Canada. It has also a very strong market segment generating about a third of its revenues. Royal Bank has shown very strong earnings, beating analysts’ estimates on a regular basis. This is not an easy task right now considering Bay Street’s heavy appetite. RY obviously has a strong mortgage market share, and this should be a concern for new investors in this stock. However, the largest bank in Canada also has one of the most solid balance sheets, and it can better endure a lending crisis than its peers.
I Don’t Think the Party is Over for Banks and Telecoms
Telecoms have started to diversify their services in order to benefit from their strong wire and wireless phone segments as cash cows to open their business in other industries. A similar movement is happening with banks going after specific niches to avoid being too much at risk with mortgages.
This is why I believe both industries will continue to grow and pay solid dividends. I agree with you that the easy money is probably gone, but this is the case with most sectors at the moment anyway. For dividend investors, an investment in Canadian banks and telecoms still remains a good play.
Disclosure: I hold shares of NA, BNS & T.
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