Tired Of The Big 3? Buy These Telecom Companies Instead

Whenever Canadian investors talk about the telecom industry, there are three names that often come to mind

It makes sense considering the industry has ridiculously high barriers to entry. These three major telecom companies are protected by a highly regulated, somewhat monopoly like structure. No company has penetrated the barriers yet, and as such Canada has some of the highest wireless prices in the developed world.

However, there are two companies that you would be wise to look at outside of the big three. One is primarily for growth, and the other sports one of the best dividends in the country today. Lets start with the income company first.

Cogeco Communications (CCA.TO)

Cogeco Communications (TSX:CCA) is a telecom company that primiarily operates in the eastern parts of Canada and the United States. Cogeco provides both residential and commercial customers with internet and telephone services, networking and hosting options. The company was recently named by us as one of the best Canadian dividend stocks to own today, and for good reason.

Cogeco’s dividend yield doesn’t quite stack up to Canada’s big three telecom companies at 1.97%, but what is so impressive is the rate at which it’s growing. Cogeco has raised dividends for 15 straight years and has a 5 year dividend growth rate of 12%. While major companies such as Bell and Telus are paying nearly all of their free cash flows towards their dividends (95% and 79% respectively) Cogeco’s dividend makes up just 37% of free cash flows. This is a huge indication that the dividend has a ton of room to grow.

Cogeco’s overall customer base is on the decline, which may turn investors away from the diversified telecom company. However, it is important to note that Cogeco is growing its customer base in one of the most important areas moving forward in today’s digital first world, internet services.

Another added bonus for Cogeco is the fact that nearly 40% of its revenue is exposed to the U.S. dollar. Although typically mobility plans are cheaper in the United States, the added premium of generating revenue in USD has a large effect on top and bottom lines.

Cogeco is trading at somewhat of a premium, which we would come to expect from the fastest growing dividend in the telecom industry. The company is trading at 14 times forward earnings with a 5 year PEG of 1.54 and a price to book of 2.38. 

Shaw Communications (SJR.B)

Shaw Communications (TSX:SJR.B) is a Canadian based telecom company that operates on the opposite side of the country as Cogeco, with a very strong presence in Western Canada. The company operates in four segments, which include its Consumer, Wireless, Business Network Services and Business Infrastructure Services divisions.

What I like about Shaw is its aggressive approach to capturing market share from the big three. Its purchase of Wind Mobile back in 2016 allowed the company to diversify in an industry where mobility users are seemingly flocking to, discount carriers. Canadian consumers are simply tired of paying extensive mobility bills. This should ultimately benefit Shaw in the end, especially if Freedom Mobile, the end product of the purchase, can grow across the nation.

In its most recent quarter, Shaw posted blowout earnings numbers. Where analysts expected EPS of $0.32, Shaw reported earnings of $0.66, a 106% beat. The company added 62,000 additions to its wireless segment and is also aggressively pursuing growth across B.C, Alberta and Ontario.

With a 2 year PEG ratio of only 0.32 and trading at 2.35 times book value, Shaw is trading at a deep discount relative to future growth. Analysts expect the company to grow both sales and earnings in the high single digits over the next 5 years, and the company also offers a lucrative dividend yield of 4.59% at the time of writing.

One thing to note, although Shaw’s dividend yield is high, there isn’t much growth behind it. The company has a 5 year dividend growth rate of only 3%, and hasn’t raised dividends since 2015. The company is paying out more than 100% of its free cash flows towards its dividend, which could affect future growth.