Best Stocks to Buy in May 2024: TSX Telecommunication Services Sector

The Canadian telecom sector has been in an upheaval. There are five noteworthy TSX stocks in the telecommunication services sector. Of the five, three have fallen steeply since April 2022, while two had a rollercoaster ride with a sharp recovery in April 2023 and January 2024. The three stocks in the downtrend are BCE (TSX:BCE), Telus Communications (TSX:T), and Cogeco Communications (TSX:CCA). The two rollercoaster stocks are Rogers Communications and Quebecor.        

What’s going on in the TSX telecommunication services sector? 

Each of these stocks has a different growth story. The telecom sector underwent consolidation, with major acquisitions completed on April 3, 2023. Rogers acquired Shaw, and Quebecor acquired Freedom from Shaw. Thus, Rogers and Quebecor shares moved in tandem. While Shaw perished, a fourth major wireless provider was born with Quebecor. You may know Quebecor from Videotron. Although not Canada’s top telco, it is growing fast in Quebec.  

The question is, should you buy the stocks of these two telcos in May 2024? 

Rebounding from an acquisition is tough, especially in a high-interest environment. These companies will now have to invest in upgrading their network infrastructure. Telcos are good dividend payers, but Rogers and Quebecor might be cautious with dividends for now. 

I am bullish on the first three stocks, BCE, Telus, and Cogeco. They are investing in 5G infrastructure and regularly growing dividends. This gives a hint that their infrastructure has regular cash flows coming in. If I had to choose two of the three to invest in May, I would choose the following stocks and here’s why. 

BCE stock 

BCE stock has fallen to a 10-year low. The company reported its first-quarter earnings in which its net profit fell 42% to $457 million. Behind the dip was a $234 million severance pay (from the planned job cuts already incorporated into the 2024 guidance) and equity derivatives losses. The telco already has a high dividend payout ratio of 111% of free cash flow in 2023. These restructuring costs will increase its 2024 ratio further as the company has increased its dividend per share by 3% while it expects FCF to fall by 3 to 11%. However, the telco assured investors in its latest earnings that it can continue to pay the $3.99 dividend per share in 2024 despite the reduced profits. 

BCE’s stock price is down 40% in two years as the telecom regulator has asked BCE to give competitors access to its network at discounted rates. While the telco is fighting against this decision, it is seeking new revenue growth avenues to monetize its network. It is shifting focus away from low-margin radio to high-margin digital media platforms and the cloud. At the end of March 2024, digital accounted for 41% of media revenue, with digital ad revenue up 72% year over year. 

A cut in the interest rate will relieve all telecom stocks from rising interest expenses. A victory over the regulator’s decision could send the stock soaring from less than $45 to its April 2022 high of over $70. This represents 50%-plus growth and an 8.72% dividend yield opportunity. Once the headwinds fade and economy revives, the stock could accelerate its dividend growth from 3% to 5%. 

Cogeco stock 

Instead of Telus, I would prefer Cogeco because it is a small-cap stock. While it is volatile, it has a higher dividend growth rate. Cogeco has been paying regular quarterly dividends and growing them by 10% in the last two years. 

Telus is a large-cap stock growing dividends by 7% annually and has a 6.72% yield. As you are already buying BCE, you could consider a slightly riskier investment and buy Cogeco stock to lock in a 6.27% yield. However, if you are a risk-averse investor, you may choose to invest in Telus and BCE instead of Cogeco and BCE.