BCE (TSE:BCE) or Telus (TSE:T), Which Top Canadian Stock is Best?

WRITTEN BY Dylan Callaghan | UPDATED ON: June 25, 2021

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Choosing between the top Canadian telecom stocks is often a difficult endeavor. Because of their massive market share and economic moat here in Canada, for most investors it doesn't make sense to own multiple, as you're simply gaining exposure to the same market.

Many are stumped over which one to choose. We can get somewhat of an idea based on historical valuations of these top Canadian stocks, but that doesn't necessarily paint the full picture when it comes to how the companies will perform in the future.

In this piece, we are going to dig in to whether or not Canadian investors should be looking at Telus (TSE:T) or BCE (TSE:BCE) in the current market environment.

Both companies are dominant forces in Canada

If you don't already know, the trio of the Big 3 telecoms here in Canada, Rogers being the outlier not included in this article, hold over 92% of the market share in Canada.

If Roger's recent acquisition of Shaw is included, pending approval of course, that number will increase.

When we have companies that are this dominant in their market, we get extremely reliable cash flows and dividends that can stand the test of time.

So which dividend is more attractive, Telus (TSE:T) or BCE (TSE:BCE)?

Telus (TSE:T) and BCE (TSE:BCE) 5 year dividend yield

BCE Telus dividend

Lets get one thing out of the way first. BCE's dividend growth streak looks relatively short compared to other telecoms at 12 years.

However, this is due to the dividend previously being frozen during a pending purchase by the Ontario Teachers Pension plan. The deal ultimately fell through, and the dividend freeze ended up resetting the company's dividend growth streak.

Telus on the other hand has increased the dividend for 17 straight years. But, as I mentioned above, reliability when it comes to dividend growth is outstanding from both companies, BCE just had somewhat of an anomaly impact its streak.

In terms of growth rates, this is where Telus is the clear standout. With a 5 year dividend growth rate of 7.2% annually, it's growing the dividend at a rate that is 40%~ faster than BCE, which has a 5.07% growth rate over that same timeframe.

In terms of payout ratios, Telus is the winner yet again, with better coverage in terms of both earnings and free cash flows, both of which are in the 75-80% range and well within historical averages. BCE's ratios are in the 120% range in terms of earnings and 84% in terms of cash flow. Simply put, neither of the dividends are at any risk of being cut.

Overall, Telus does provide the most "well rounded" dividend, with higher growth rates, a more consistent growth rate and better coverage ratios. However, for high income earners you could be more attracted to BCE yielding 5.68% to Telus's 4.6%.

What Canadian telecom is best for future growth?

In my eyes, this is where we have a clear cut winner, and that is Telus.

I'm not alone in this line of thinking either, as analysts expect the company to post 4% earnings growth through 2021 and high single-digit revenue growth over that same time period.

Although there is similar earnings growth estimates for BCE, revenue is expected to grow at a low single digit pace.

BCE (TSE:BCE) and Telus (TSE:T) 5 year total return

Estimates aside, my growth thesis for Telus and why I think it has in the past, and will continue to outperform BCE in the future is due to its exposure to faster growing, more lucrative business segments.

Moving forward, Telus's exposure to the telehealth, security, and 5G networks will allow it to outperform its peer BCE, which primarily focuses on telecom (including 5G) and a media division.

The company's media division suffered significantly during the pandemic, and I feel like this industry is somewhat "tapped out" whereas Telus is navigating into sectors that are still in their infancies.

Overall though, it's highly unlikely either will let you down

When I speak of outperformance here, I'm speaking in relatively small numbers. If Telus does outperform, it's not like it will be with landslide numbers, unless something changes drastically.

Both of these telecoms are going to provide Canadians with outstanding reliability and income for years to come. Although Telus has and will likely continue to outperform BCE in terms of share price returns, BCE erases a large portion of the gap with its lucrative dividend.

Contrary to popular belief, you could make a case for owning both, as Telus is prominent in Western Canada while BCE has more of a country wide presense.

Looking for a bit more growth? I'd lean towards Telus. Looking for a rock solid, blue-chip, high yielding company? BCE is one you'll likely enjoy.

Two top Canadian stocks to watch after this major index change.