As a Canadian consumer, I'm not a fan of our oligopolistic industries – banks, pipelines, and telecommunications companies - due to their anti-competitive nature. As a Canadian investor, I love them given how well they've historically performed over long periods of time. Go figure.
When it comes to telecommunications, or telecoms, the space got even less competitive recently thanks to Roger Communications' merger with Shaw Communications (TSX:SJRb) earlier in April 2023. The $26 billion dollar deal was finally approved after years by Canada’s Industry Minister François-Philippe Champagne.
As it stands, the telecom sector currently plays a small, but important role in the overall Canadian market. As of April 5th, 2023, telecom sector stocks represent 5.11% of the iShares S&P/TSX 60 Index ETF (XIU). However, many investors overweight them thanks to their lower volatility and high dividends.
Let's take a look at the possible broad-level implications of this merger and examine some ETFs that investors could use to benefit from it long-term.
When giants meet giants
My framework for analyzing the impact of this deal center around three themes, all of which should be examined holistically and with a long-term perspective:
- Competition: In my opinion, the merger has further concentrated market power in the hands of fewer players, further solidifying the oligopolistic nature of the Canadian telecommunications industry. The big three telecom companies, BCE (TSX:BCE), Rogers/Shaw, and Telus (TSX:T), will have even more control over the market, potentially leading to less choice for consumers. The merger could also make it even more difficult for new entrants to break into the already saturated market.
- Pricing: With reduced competition comes the ever-present risk that the dominant industry players may raise services prices. This could lead to higher costs and fewer value-adds for consumers in the long run. A recent example was the Canadian Radio-television and Telecommunications Commission's (CRTC) rejection of Telus' request to charge credit card processing fees, which was highly controversial among consumers.
- Infrastructure: On the positive side, the merger could lead to increased investment in infrastructure and network improvements, as the combined resources of Rogers and Shaw may enable greater economies of scale. This could potentially benefit customers, especially in underserved rural areas where connectivity has always been an issue.
Rogers-Shaw Merger: Possible ETFs to watch
To make a long story short, my personal view is that the merger is bad for telecom customers, but good for telecom investors long-term. It only heightens the favorable conditions enjoyed by the telecom giants over the last two decades – minimal competition, endless customer base, and stable revenues.
However, gaining access to telecom stocks via an ETF is harder than it appears. While numerous Canadian ETFs that target sectors like banking, oil & gas, and utilities exist, there doesn't appear to be a dedicated pure-play telecom ETF. I think that this is due to the limited selection of companies.
Logically speaking, demand for such a product would likely be low as most DIY investors could simply buy Rogers/Shaw, BCE, and Telus on their own, and many do subscribe to this approach given that each of these stocks have been favorable dividend payers for decades.
With that in mind, investors could use Canadian dividend ETFs as a proxy for telecom exposure. For example, the top two holdings in the iShares S&P/TSX Composite High Dividend Index ETF (XEI) as of April 5th, 2023 are BCE (5.25%) and Telus (5.24%) respectively.
Another ETF I personally like is the Horizons Canadian Utility Services High Dividend Index ETF (UTIL). Don't let the name fool you – this ETF is more of an infrastructure ETF than a pure-play utility one.
In addition to holding traditional utility companies like Fortis (TSX:FTS) and Emera (TSX:EMA), UTIL also holds pipelines like Enbridge (TSX:ENB) and Pembina. It also includes a sizable allocation to telecoms, which include Rogers (8.44%), BCE (7.99%), and Telus (7.90%) as of March 31st, 2023.
This content was originally published by our partners at the Canadian ETF Marketplace.