Big Canadian bank and big Canadian telecom stocks are often held as anchors in dividend portfolios for passive income. However, some experts believe that big Canadian telecom stocks will fare better against a recession than big Canadian banks.
In fact, some pundits think we’re already in a recession with a fully fledged recession potentially happening by late this year or early next year. Therefore, in the short term, telecom stocks will probably be more resilient than bank stocks. If you need passive income now, consider Canadian telecom stocks first. Perhaps come back to the (long-term) solid Canadian bank stocks later in the year.
Indeed, telecom revenues are more tied to population growth and inflation than economic health. That is, even during bad economic times, people are still unwilling to forgo their mobile phones and the internet.
Which telecom is a must-own? Sidestepping away from the drama between the Rogers and Shaw merger, it leaves BCE (TSX:TSX:BCE)(NYSE:BCE) and TELUS (TSX:T)(NYSE:TU) as choices for a must-own TSX stock for passive income today. Let’s compare the two.
Dividend BCE stock has paid uninterrupted dividends since 1881. And it has increased its dividend annually since 2009. TELUS stock started paying dividends in 1999 and has increased its dividend every year since 2004.
To be fair, I believe BCE cut its dividend and reset its dividend-growth track in 2008 due to a privatization that was happening at the time. Additionally, its financial position, earnings, and cash flows appeared to be healthy in 2008. So, BCE’s dividend-growth streak would have roughly matched TELUS’s otherwise.
At writing, BCE and TELUS yielded 5.76% and 4.66%, respectively. Their recent payout ratios are as follows. BCE’s trailing 12-month (TTM) payout ratio was 112% of earnings available to common stockholders. Its payout ratio was 43% of operating cash flow and 3.8 times of free cash flow due to a higher-than-normal capital spending to invest for the future.
What about TELUS? Its TTM payout ratio was 64% of earnings available to common stockholders. Its payout ratio was 24% of operating cash flow and 1.5 times of free cash flow due to a higher-than-normal capital spending.
Even when payout ratios are extended, dividend stocks can still maintain or even increase their dividends in the short term from other means. However, this comparison suggests that although TELUS pays a lower yield, its dividend is safer.
Balance sheet Investopedia explains that “the current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year.” Typically, investors want to see the current ratio solidly above one to indicate the company can meet its short-term obligations.
The debt-to-asset ratio is a solvency ratio that measures the long-term survivability of a company.
BCE’s most recent current ratio and debt-to-asset ratio were both about 65%. TELUS’s most recent current ratio was 64%, while its debt-to-asset ratio was 66%. Since they’re peers, it’s not surprising that these ratios are similar.
Valuation Finally, we’ll look at the valuations for the telecom stocks. At $63.85 at writing, BCE trades at about 19.4 times earnings, while it’s estimated to grow earnings per share by about 6% per year over the next few years. Then, there’s TELUS, which trades at about 25.3 times earnings but has a higher growth rate that’s projected to be 10% or greater.
The must-own telecom stock for passive income TELUS’s yield is lower but it’s still pretty decent. Additionally, its dividend appears to be safer, and it offers better value and greater growth. Therefore, I’d pick TELUS over BCE right now.
The post This Telecom TSX Stock Is a Must-Own if You Want Passive Income appeared first on The Motley Fool Canada.
The Motley Fool recommends ROGERS COMMUNICATIONS INC. CL B NV and TELUS CORPORATION. Fool contributor Kay Ng has no position in any of the stocks mentioned.