A customer's shadow casts on the sidewalk as he leaves a Rogers Plus store in the Rogers Centre in Toronto.
If you were to listen only to catchy talking points, you would assume that the big Canadian telcos like Rogers and BCE are under siege from small upstart wireless players and are having a hard time making money. But take a look at their market performance over the past year and you might get a be surprised.
Over at Telus and Cogeco, the shares have gone up 15 per cent in one year, while Rogers posted a 13 per cent return. Add in dividends and those total returns are very strong. Much better than 6 per cent loss for the entire Toronto Stock Exchange over the same period.
Can this run continue?
RBC Dominion Securities analyst Drew McReynolds at RBC Dominion Securities addressed that very question in a new research note. His thesis: the sector offers value, but won't be as hot. He expects an average total return of 13 per cent over the next 12 months, which is "modest" compared to what investors earned last year.
There are a number of variables at play. New entrants (think Wind Mobile, Mobilicity, etc.) had extremely aggressive pricing schemes in the last quarter of 2011, mostly tied to the holidays. If those continue, monthly plan pricing could take a hit. However, Mr. McReynolds points out that the new entrants are tailored to the lower-end of the market "leaving the higher-end postpaid/smartphone segment less scathed for the incumbents."
Internet Protocol television (IPTV) is also ramping up. Telus has made huge gains on this front, eating into Shaw's stronghold in western Canada, and Mr. McReynolds predicts Telus to post a subscriber number north of 500,000 for the fourth quarter of 2011. As IPTV becomes more popular, typical cable providers like Rogers could lose subscribers.
There is also a great deal of uncertainty around the coming wireless auction rules and the pending decision on foreign ownership. Mr. McReynolds assumes the rules will grant the new entrants "some form of advantage versus the incumbents (i.e., set-asides, caps, foreign ownership relaxation) as a means to prolong elevated competition in the marketplace."
Taking all that into account, he particularly likes Telus, Rogers, Cogeco and Quebecor , because he believes they will be high dividend growers over the next two years, they can maintain their payouts and they are trading at reasonable valuations.
So yes, the growth can continue. Just not with as much force.
Tim Kiladze