Here's why you shouldn't fret over the highly priced Canadian telecom stocks

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Canadian telecom stocks, beloved by dividend-loving investors, are curiously expensive relative to their U.S. peers. So why should investors stick with the pricier home team?

The answer: Canadian telecom companies enjoy broader diversification, encounter fewer competitors and face a lower threat of disruption – significant advantages that are embedded into valuations and unlikely to disappear any time soon.

They're certainly not cheap, though. BCE Inc., Rogers Communications Inc. and Telus Corp. have an average estimated price-to-earnings ratio of 17.5. That's more than five points higher than the average P/E for AT&T Inc. and Verizon Communications Inc. in the United States.

Dividend yields are also remarkably different. The average yield among the three Canadian telecom stocks is 4.1 per cent. While attractive, that's well below the more dazzling average dividend yield of 5.6 per cent for the U.S. stocks.

Robert Bek, an analyst at CIBC World Markets, prefers another measure: Based on estimated EBITDA (earnings before interest, taxes, depreciation and amortization) over the next 12 months, Canadian telecom stocks have a multiple of 8.3, well above the 6.6 multiple for U.S. telecom stocks.

If investors are paying a premium for Canadian telecom stocks, they are not getting profound profit growth in return.

The top Canadian players have increased their adjusted annual profit over the past five years by a total average of just 14 per cent. U.S telecom results look more impressive: AT&T increased its profits by 25 per cent over the past five years, while Verizon increased its profits by 70 per cent.

But while U.S. telecom stocks might look attractive on the surface, a deeper look into the telecom sector reveals a number of advantages in favour of Canadian stocks and these advantages will likely continue to drive the sector.

"The valuation premiums seen today could expand further over the next few years," Mr. Bek said in his note.

He pointed out that in Canada, just four players – BCE, Rogers, Telus and Shaw Communications Inc. – control about 80 per cent of the broadband and video market, and more than 90 per cent of the wireless market. In contrast, the U.S. telecom market is more fragmented among broadband, video and mobile categories.

"This lack of balance in the U.S. dictates occasionally desperate actions from various players, manifesting in wildly aggressive offers," Mr. Bek said. "We hesitate to label the situation [in Canada] as a duopoly or oligopoly, as material competition does exist, but there is very little incentive for pricing aggression, which cannot be said for U.S. markets."

The U.S. even has rogue players. For example, according to CNET, Sprint has been offering unlimited data for a year on wireless plans, forcing AT&T to respond with free HBO.

Although Canadian consumers might like these offers to come here, telecom investors will no doubt do better without them: Mr. Bek pointed out that pricing for telephone services in Canada continues to outpace the overall rate of inflation, while services in the United States lag inflation.

Canada's tough restrictions on foreign ownership are also keeping potentially disruptive multinational competitors, such as Deutsche Telekom and Vodafone, at bay – and Mr. Bek believes that there is no great pressure on the Canadian government to change the rules. At the same time, Canada also appears to be immune to the arrival of interlopers from outside the traditional telecom sector. Google Fiber offers high-speed Internet service in several U.S. markets, but Mr. Bek believes the Canadian market is not a target of these new players.

"The most obvious reason is that the market is just too small. Why bother?" he said.

He added: "That argument is further supported by the stranglehold that the Canadian players have on the market. There is just no incentive for interlopers to enter this market when there are significant opportunities in the U.S. market."

Investors have to pay for the privilege of owning Canadian telecom stocks, but they're getting something for the premium: stability.