BCE building in Montreal
Concerns about a shakeup in Canada's wireless industry have been causing headaches for investors in the biggest incumbent players, Telus Corp., BCE Inc. and Rogers Communications Inc. - but new investors should rejoice.
That's because the stock market has already anticipated the issues involved with the established players having to share the marketplace with some well-heeled competitors, which could erode the incumbents' market share and send their already substantial marketing costs even higher.
BCE shares are 36 per cent below their highs in 2007, and are back to where they were 10 long years ago. Long-term investors over the past decade have received nothing for their patience except a stream of dividends.
Telus is just as pitiful (full disclosure: I own Telus). The shares are 47 per cent below their 2007 highs, and now trade at 2004 levels. Five years, and no return beyond the dividend.
These dismal numbers might turn you off the stocks, and make you wonder what is going to happen to them when competitors begin to knock on doors. However, in the upside-down world of value investing, these dismal numbers should actually inspire investors: They suggest that there is relatively little downside risk, and considerable upside opportunity.
Why? For one, the Canadian wireless market, though narrow, is hardly free from competition right now. For example, Telus and BCE compete head to head across Canada, already battling for cellphone customers among 98 per cent of Canadian households. New entrants will heat things up, for sure, but it's a stretch to conclude that they will rob the incumbents of existing customers.
Newcomers like the look of Canada because of its untapped potential: A mere 62 per cent of Canadians own a wireless device, compared with penetration rates of more than 100 per cent in places like Finland and Italy, where some people own more than one phone.
Some estimates suggest that Canada will add six million new wireless customers over the next four years, a prospect that has the new guys drooling. This suggests that the pie isn't necessarily going to be carved into smaller pieces: The pie is going to get bigger.
If incumbents do run into trouble in the near future, there is always an escape route: They can merge. Jonathan Allen, an analyst at RBC Dominion Securities, raised this possibility in August, arguing that a merger of equals within the next couple of years makes sense because it would cut costs by $1.2-billion annually.
In the meantime, investors can look forward to receiving some of the most attractive dividends in Canada. Telus currently yields 5.5 per cent and BCE yields 6 per cent, giving investors a nice reward for picking up these stocks at a discount.
David Berman