Ruth Saldanha: Hello, and welcome to our limited time series "The Morningstar Canada Stocks Outlook for 2023," where we will be speaking with Morningstar equity analysts and find out what they expect in the new year. Today, Matthew Dolgin of Morningstar Research Services is here to discuss Canadian telecom. And what a year it's been with outages, mergers and yes, dividends.
Matthew, thank you so much for being here today.
Matthew Dolgin: Thanks for having me, Ruth.
Canadian Telecom Stocks Exceeded Expectations in 2023
Saldanha: It's been quite the year for Canadian telecom companies. Was the year pretty much in line with your expectations?
Dolgin: Overall, I guess, I'd say that it exceeded my expectations. It's been a good year for each of the big three. I'd say their wireline businesses with broadband has been consistent with recent history and right in line with what I'd have expected. But wireless was really good. For the big three, they started adding subscribers at a much faster rate than they had in recent years. And on top of that, they started taking in more revenue per customer because roaming revenue came back for them to a greater extent as people are traveling more. And then, finally, on top of that, they were able to keep their margins up despite the inflationary environment. So, all in all, again, especially for the big three, I'd say it was a really good year for these companies.
Rogers-Shaw Merger to be in Focus in 2023
Saldanha: Going ahead for 2023, what should investors expect?
Dolgin: Well, I think the biggest thing for 2023 that the industry is going to depend on is what happens with the Rogers (RCI.B)-Shaw (SJR.B) merger. So, we should get a final decision from regulatory bodies by early in the year, I would say. And the most interesting thing to me is what's going to happen with the wireless market. So, if that deal gets approved, Quebecor (QRB.B) is going to take over Shaw's Freedom Mobile wireless business, and I think that's going to make for the strongest possible fourth national competitor. So, it's going to be really interesting to see when you have a strong fourth player getting up and running with a big customer base right off the bat how much pressure they can put on the big incumbents and whether we see pricing come down a little bit and whether that takes away from some of the new wireless subscribers that the big three have really been taking the lion's share of.
Watch for Macro Risks in 2023
Saldanha: So, what are some of the key risks on which investors should keep an eye in 2023?
Dolgin: I'd say the biggest risk is macro risk. So, if the economy goes into a recession, most likely it's going to pull back consumer spending a little bit, maybe have them not get new phones, have new services quite so much. So, that might be a headwind if it were to occur on, let's say, net additions in the wireless industry, which, again, have been really high for these companies. I think the other thing, getting back to what I was just saying, is depending on what happens with that Shaw-Rogers merger, whether there are concessions, additional concessions that the companies involved have to make, that could, again, weigh on pricing throughout the industry or lead to some other regulatory pressures. I'd say those are things I'd be on the lookout for. And other than that, I'd expect really more of the same.
2 Canadian Telecom Stocks May Raise Dividends, 2 May Not
Saldanha: Well, one thing we love up here is our dividends. So, what's the dividend outlook for Canadian telecom companies?
Dolgin: I think Telus (T) and Bell (BCE) are the ones that are best positioned to raise their dividends again. They've done it every year for really the last decade, and they're well-positioned with their cash position to do it again. They both had accelerated capital spending in the last few years, which is coming to an end, and I'd expect them to raise further. As far as Rogers, again, a lot depends on the fate of that merger with Shaw. Their dividend has been flat the last couple of years, and I'd expect a flat dividend again in 2023, because if they do acquire Shaw, they're going to have big cash outflows because of that. If they don't, then it's possible they'd raise it. But I wouldn't be looking for a raise from Rogers. And then, Quebecor is the interesting one. They've also raised their dividend in the past few years, but if they do embark on this national wireless rollout, which they really should do with or without the acquisition of Shaw's Freedom Mobile, they're going to be in a little bit tighter cash position also. So, I wouldn't expect as much out of them. I'd really be looking at BCE and TELUS if you're looking for dividend growth.
Top Canadian Telecom Stock Pick for 2023
Saldanha: So, with all this said, what's your top Canadian telecom pick for 2023 and why?
Dolgin: At this point, I guess, I'd still say Rogers. We put out a piece a few months ago saying that we really like all of the Canadian telecom companies. And when the market presents an opportunity, we think all of them can be buys. And at this point, I'd say each of them, except for Shaw, is undervalued to us. With that said, Rogers is probably the most undervalued, not as much as it was a few months ago when it was sold off really hard, both because of the network outage it had and also because of concerns that maybe that Shaw merger wouldn't go through. If the Shaw merger doesn't go through from these levels, there's a good chance the stock would drop some more, and I think that would be even more of a buying opportunity, because I do think it's undervalued, and I think their business is in strong shape whether they acquire Shaw or not. That said, I also like BCE quite a bit, not quite as undervalued in our view. But again, I think investors can't go wrong with some of these telecom companies. And the biggest thing to me is to be opportunistic. Their businesses are in good shape. And if the market presents an opportunity, if they sell off, it's probably a good time to buy any one of the major providers in Canada.
Saldanha: Great. Thank you so much for joining us today with your perspectives, Matthew.
Dolgin: Thanks, Ruth.
Saldanha: More analysts covering Canadian stocks will be joining me to chat about their expectations for 2023. So, stay tuned. For Morningstar, I'm Ruth Saldanha.
