Canada’s telecommunications sector has been missing the mark for almost two years as stock prices have fallen short of market expectations, making it the only Toronto Stock Exchange sector to have a negative return this year.
But the regulatory and interest rate environments that contributed to this lacklustre performance are showing signs of settling, with some experts saying the stocks are undervalued.
The cause of a lot of the unrest in the market started in early 2023 when Quebecor Inc. acquired Freedom Mobile, the fourth substantial national competitor beyond Telus Corp, Rogers Communications Inc., and BCE Inc., says Matthew Dolgin, senior equity analyst for Morningstar, Inc. in Chicago.
“In our view, we have the strongest fourth national competitor we’ve had...for as long as I’ve covered these companies,” he says.
While regulatory hurdles have been a concern, Mr. Dolgin says, in his view, the dip is based more on fear. There were regulatory requirements to get Rogers’ acquisition of Shaw Communications Inc. approved, which included selling Freedom Mobile to Quebecor.
“We’re looking to see how it plays out before we feel more comfortable or have a better sense of how these companies will do,” he says.
Another headwind came from a different set of regulations laid out last year. In late 2023, BCE and Telus were both told by the Canadian Radio-television and Telecommunications Commission (CRTC) that they would have to open up their fibre networks in Ontario and Quebec to other companies. BCE fought the decision but lost that battle in February. The decision means independent companies will be allowed to sell internet services to customers in those provinces using the fibre cables BCE has laid.
Mr. Dolgin says the results of that decision haven’t played out yet, and he’s waiting to see how it affects the sector. While the decision could mean more competition in the market and less opportunity for exclusivity for BCE, he adds, all the major telcos have some regulatory issues they’re facing these days.
“Given the magnitude of how much the stocks are down, [it looks] much more sentiment-based than results-based,” he says, adding the companies are in “good shape and undervalued.”
High interest rates have also been a factor, eroding the attractiveness of the telecommunications companies’ dividend yields compared with other fixed-income investments, says Mickey Ganguly, senior equity analyst at CIBC Asset Management.
“With interest rates coming down, we’re starting to see that spread widen and that makes the sector more attractive,” he says.
When his team evaluates the sector on a total-return basis, it screens extremely well because of its stable financials and dividends. “That’s why we are bullish on the sector.”
However, Mr. Ganguly also references the intensely competitive environment in the space over the past 12 to 18 months, which has put pressure on the average revenue per user.
Indeed, because of the increased competition, monthly wireless plans dropped from $60 a month on average to less than $40 per month for certain brands. But while consumers loved the savings in a market that has long been criticized for lack of competition, the lower prices contributed to the sector’s underperformance.
Companies have adjusted their offerings in recent months, Mr. Ganguly says, creating “a more rational competitive environment” that makes him more optimistic about growth. “I believe we’re finally seeing some relief on these headwinds.”
Rogers’ recent $4.7-billion purchase of BCE’s stake in Maple Leaf Sports and Entertainment Ltd. also shook up the sector. While it’s still early to assess the deal, Mr. Ganguly views it as a “win-win for both players.”
“In terms of timing, probably you’re looking at BCE getting the benefit of this deal sooner on their financials than Rogers,” he says. “But I think it makes a lot of sense for both of these parties to enter this agreement and finish this transaction.”
Not all investors are ready to jump on board with the telcos just yet. Amit Joshi, portfolio manager at Barometer Capital Management Inc. in Toronto, says that while some yield-seeking investors are returning to telcos as interest rates come down, many are looking elsewhere.
“In our process, we look for good companies that are getting better, and we follow some of the technical strengths in the market from a macro perspective,” he says. “We haven’t been in the telcos, and we still are not invested in telcos.”
