By Alastair Sharp
TORONTO, Sept 12 (Reuters) - A day of reckoning may await those investors who have bid up the share prices of Canada's established telecoms on attractive dividend growth while pushing competition concerns to the back of their minds.
The dominant players, BCE Inc's Bell companies and Telus plus cable-cum-telco Rogers, control some 95 percent of the Canadian wireless market and should gain from an explosion in smartphone use and attached rise in data, even as their landline offerings struggle.
But a combination of unkind regulatory rulings and a federal government keen on increasing competition threatens to devalue billion-dollar-plus investments in upgraded networks.
The incumbents' valuations have grown between 13 and 25 percent this year, although most watchers say that reflects decent yields during economic uncertainty as much as it does their ability to withstand market liberalization.
'All three stocks have done exceptionally well over the last six months or so,' said Jonathan Allen at RBC Capital Markets. 'It feels like a game of chicken however. The problem is how long do you hold on to the stock before the oncoming rush of wireless competition starts to eat away at the margin on these guys?'
DIVIDEND PLAY
Rogers has increased its annual dividend 10 percent this year, according to Reuters data, while Telus and Bell have raised payouts by 5.2 percent and 7.4 percent respectively over the same period.
Both Rogers and Telus went ex-div last week, while Bell will follow suit on Sept. 13.
While bullish on the sector, independent analyst Chris Damas of BCMI Research suggests investors sell into the ex-div on diminishing growth prospects and expected stock price weakness.
'It's worthwhile to trade out of them before the dividend date until the CRTC starts becoming a little more fair-handed about how they decide who is the winner and the loser in this game,' he said, referring to industry regulator the Canadian Radio-television and Telecommunications Commission.
In two decisions issued late last month the CRTC forced the incumbent telcos to expand rural wireline broadband, give rebates to consumers and offer third-party Internet service providers using their networks the same Internet speeds they offer consumers.
'If it's a little guy in Chatham (Ontario) like TekSavvy that's fine, but if it's a big guy like Netflix offering a competing Internet TV product, I'm getting nervous,' Damas said.
WORSE TO COME
The government raised C$4.25 billion ($4.13 billion) in a wireless auction in 2008, selling spectrum to incumbent operators and cable companies looking to broaden their footprint. It also set aside a portion for upstarts eyeing the lucrative market, which boasts some of the steepest rates in the world.
Since then each of the incumbents has sought to staunch the outflow of disgruntled customers by launching an off-brand service -- Koodo for Telus, Solo for Bell and most recently chatr for Rogers -- mostly matching prices in the high population centers targeted by the newbies.
It appears to have worked. While newcomer Globalive's Wind Mobile, first out of the gate with a late 2009 launch, recently said it had snared more than 100,000 subscribers, incumbent metrics still appear strong.
'Churn is not up materially that we can see, ARPU (average revenue per user) seems to be unaffected thus far and most crucially, although the new entrants are growing faster than expected, the incumbents are continuing to have positive growth,' Deloitte's technology, media and telecom analyst Duncan Stewart said.
Yet the worst might just be beginning as a more formidable model enters the stage -- the established regional cable operator branching into wireless.
Videotron, a cable company owned by Quebecor that services the province of Quebec, launched a 3G wireless service on Thursday that adds the fourth leg to its bundled package of cable television, high-speed internet and landline telephony.
'A pure wireless new entrant is usually less of a threat to an incumbent than a new entrant that is capable of offering a bundle,' Stewart said, referring to Videotron and others.
Alberta-based Shaw Communications, also bought wireless spectrum in the 2008 auction and plans to launch a network late in 2011. Its purchase of Canwest television this year gives it more to broadcast wirelessly once launched.
'People are very, very near-sighted and have looked at dividend increases this year ... without really looking at what lies ahead,' said Dvai Ghose, an analyst at Canaccord Genuity.
(Editing by Frank McGurty) Keywords: COLUMN CANADA/MARKETS (alastair.sharp@reuters.com; +1 416 941 8118; Reuters Messaging: alastair.sharp.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
TORONTO, Sept 12 (Reuters) - A day of reckoning may await those investors who have bid up the share prices of Canada's established telecoms on attractive dividend growth while pushing competition concerns to the back of their minds.
The dominant players, BCE Inc's Bell companies and Telus plus cable-cum-telco Rogers, control some 95 percent of the Canadian wireless market and should gain from an explosion in smartphone use and attached rise in data, even as their landline offerings struggle.
But a combination of unkind regulatory rulings and a federal government keen on increasing competition threatens to devalue billion-dollar-plus investments in upgraded networks.
The incumbents' valuations have grown between 13 and 25 percent this year, although most watchers say that reflects decent yields during economic uncertainty as much as it does their ability to withstand market liberalization.
'All three stocks have done exceptionally well over the last six months or so,' said Jonathan Allen at RBC Capital Markets. 'It feels like a game of chicken however. The problem is how long do you hold on to the stock before the oncoming rush of wireless competition starts to eat away at the margin on these guys?'
DIVIDEND PLAY
Rogers has increased its annual dividend 10 percent this year, according to Reuters data, while Telus and Bell have raised payouts by 5.2 percent and 7.4 percent respectively over the same period.
Both Rogers and Telus went ex-div last week, while Bell will follow suit on Sept. 13.
While bullish on the sector, independent analyst Chris Damas of BCMI Research suggests investors sell into the ex-div on diminishing growth prospects and expected stock price weakness.
'It's worthwhile to trade out of them before the dividend date until the CRTC starts becoming a little more fair-handed about how they decide who is the winner and the loser in this game,' he said, referring to industry regulator the Canadian Radio-television and Telecommunications Commission.
In two decisions issued late last month the CRTC forced the incumbent telcos to expand rural wireline broadband, give rebates to consumers and offer third-party Internet service providers using their networks the same Internet speeds they offer consumers.
'If it's a little guy in Chatham (Ontario) like TekSavvy that's fine, but if it's a big guy like Netflix offering a competing Internet TV product, I'm getting nervous,' Damas said.
WORSE TO COME
The government raised C$4.25 billion ($4.13 billion) in a wireless auction in 2008, selling spectrum to incumbent operators and cable companies looking to broaden their footprint. It also set aside a portion for upstarts eyeing the lucrative market, which boasts some of the steepest rates in the world.
Since then each of the incumbents has sought to staunch the outflow of disgruntled customers by launching an off-brand service -- Koodo for Telus, Solo for Bell and most recently chatr for Rogers -- mostly matching prices in the high population centers targeted by the newbies.
It appears to have worked. While newcomer Globalive's Wind Mobile, first out of the gate with a late 2009 launch, recently said it had snared more than 100,000 subscribers, incumbent metrics still appear strong.
'Churn is not up materially that we can see, ARPU (average revenue per user) seems to be unaffected thus far and most crucially, although the new entrants are growing faster than expected, the incumbents are continuing to have positive growth,' Deloitte's technology, media and telecom analyst Duncan Stewart said.
Yet the worst might just be beginning as a more formidable model enters the stage -- the established regional cable operator branching into wireless.
Videotron, a cable company owned by Quebecor that services the province of Quebec, launched a 3G wireless service on Thursday that adds the fourth leg to its bundled package of cable television, high-speed internet and landline telephony.
'A pure wireless new entrant is usually less of a threat to an incumbent than a new entrant that is capable of offering a bundle,' Stewart said, referring to Videotron and others.
Alberta-based Shaw Communications, also bought wireless spectrum in the 2008 auction and plans to launch a network late in 2011. Its purchase of Canwest television this year gives it more to broadcast wirelessly once launched.
'People are very, very near-sighted and have looked at dividend increases this year ... without really looking at what lies ahead,' said Dvai Ghose, an analyst at Canaccord Genuity.
(Editing by Frank McGurty) Keywords: COLUMN CANADA/MARKETS (alastair.sharp@reuters.com; +1 416 941 8118; Reuters Messaging: alastair.sharp.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.