Telco Valuation Reality Check Event
With decent strength recently in both BCE shares (now up 13% YTD) and TELUS shares (up 10% YTD), and also with interest rates having dipped back down, we thought it would be useful to update investors on how the valuations look for these stocks relative to long-term trends.
Impact: NEUTRAL
In the exhibit below, we show our dividend yield versus bond yield (GoC 10-year) spread charts for BCE and T shares. We also have charts on rates versus EV/ EBITDA multiples that we can provide upon request (not enough room for them in this brief note), and of course we can update/send our comp table (current adjusted EV/EBITDA multiples on 2021E are 8.6x for BCE and 8.9x for TELUS).
What we can see from the charts is that spreads blew out to unusually high levels during most of 2020, so that the recent strength in these stocks has merely returned us closer to the long-term (five year) averages. So we would by no means call the stocks overvalued at this point. Even if the 10-year yield were to increase by 50bps over the next few months, we believe there is enough cushion to support BCE/T shares (noting that there were extended periods in 2017/2018 when the dividend-to- bond spreads were comfortably below the long-term averages).
If TD Economics is correct and we get up to 2.25% for the 10-year by mid-2022, then valuations on current dividends could start to look slightly stretched, but we are not concerned for three key reasons:
1. Dividends should be 5-8% higher by then.
2. By mid-2022, we should have good visibility into meaningful FCF growth in 2023 subsequent to accelerated capex investments in FTTH and 5G networks.
3. Roaming and immigration (and other smaller pandemic headwinds) should be more fully recovered by mid-2022.