Telecoms connecting in the age of COVID-19

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- Hello, and welcome to the MoneyTalk COVID-19 Daily Bulletin for Thursday, May 21. I'm Anthony Okolie. In a few minutes, I'll be speaking with Andriy Yastreb, Telecom and Media Analyst, about how the telecoms have weathered the coronavirus pandemic, as well as the long-term outlook for the sector. But first, a quick wrap of today's headlines.

Oil prices have rallied for a sixth straight session, touching their highest level since March. US stockpiles of oil have been shrinking, and that's raising hopes demand for oil may be recovering as shutdown measures begin to lift.

Unemployment levels continue to swell in the US. Last week, another 2.4 million Americans applied for unemployment benefits. However, first-time claims have declined for seven straight weeks, after peaking at 6.9 million in late March.

Retailer Best Buy says its transition to curbside pickup helped online sales surge by 155% from last year. That helped to offset reduced foot traffic and partial store closures related to the shutdown.

And finally, a high school in Calgary received some star power for an initiative to help support seniors. Students at Ever Active School created a hotline for senior citizens to call and listen to jokes during COVID-19. Well, earlier this week, late night TV host James Corden interviewed a teacher involved with the project, then brought in well-known comedian Billy Crystal to tell some jokes and add them to the hotline.

And that's a wrap of today's headlines. Next, my conversation with Andriy Yastreb.

Andriy, there's still so much uncertainty around COVID-19. How the telecom and cable stocks performed so far this year?

- So far, they've performed well on a relative basis. If you look at the broader market, the S&P/TSX index is down minus 15% so far this year, as of yesterday. And if you look at communications sector, it's down minus 12%, and the big three companies in the industry-- Bell, TELUS, and Rogers-- are down minus 10.6%. So they've outperformed the index by over four percentage points so far this year.

And if you look at financial performance in the first quarter, telecom posted revenue that was flat year on year and earnings per share that were down minus 1.5% among the companies that reported so far. If you compare it to the broader index, for TSX, revenue for the companies that reported so far was down minus 7% and earnings per share were down minus 20%. So definitely telecom provides some stability in this uncertain environment.

With people staying at home more, are some of these services seeing increased usage? And which services are being impacted more?

- Yes, absolutely, there are some services that we see increased usage. For example, broadband at home, TV, and phone calls, they're all up. The problem for telcos in the short term is that, because these are unlimited plans, all-you-can-eat for customers, it doesn't translate into revenue bump immediately for telecoms.

And there are some services that are impacted by COVID. So for example, roaming fees are down significantly, as nobody's traveling. But it's only a few percentage points of total wireless revenue. Data overages are also down materially, as people are using Wi-Fi, because companies also proactively increase data buckets for consumers or waive some of the fees.

And small businesses are impacted, as well, as many of them are closed, and they either suspended their services or asked for delay of payments for services. Some of the telecom companies also have media subsidiaries. And in those segments of the business, we will see a sharp decline in advertising revenue.

And how has this increased usage translated into revenues for the telecoms and cable companies?

- So if you think about financial impact overall, revenues will definitely have a negative impact in the short term. But it will not be as bad as a lot of other industries impacted by COVID. And on the cost side, there are several offsets from a profits perspective. So for example, fewer people are buying new phones, which means less subsidy cost to providers. And it was a big expense for them in the past.

Also, not as many people are switching homes or changing internet providers at home, or TV providers, which means fewer truck rolls for these companies also lower costs. And from bottom line perspective, revenue will definitely be negatively impacted in the short term, offset by some cost savings, so profits will not be impacted as much.

And what we really care about, the free cash flow generation of these companies, I think the impact will be even less severe, as a lot of these companies have a lot of capital expenditures that they're doing, and if they have to, they might cut those. So far, they've continued to invest through the cycle, so it tells us that the impact is not that bad.

And where do you see valuations for telecom stocks? Are they attractive?

- So I think, if you think about the sector overall, there are some definitely very attractive aspects of it. So Verizon in the United States provided some information. When stimulus was released in the US in April, about 6% of people modified in some way their mortgage payments, but only about 2% asked to modify their wireless bills.

And what it tells us is that being connected to the internet is absolutely critical for people in this environment, and that people potentially would stop paying their mortgage or rent payments before they stopped paying for their wireless bills or for broadband. So telecom is definitely defensive in this uncertain environment. And if this recession lasts longer than people expect or is deeper than people expect, the sector will outperform the market.

And second part of why it's really attractive here, the sector in Canada provides 5.1% dividend yield. And that's really attractive in the zero rate environment that we have. And we have a chart here that shows the spread of telecom dividend yield over the 10-year government of Canada bond yield over last 10 years. And the average spread was 2.5%. Now, it's a record 4.5%. So in addition to being defensive sector, telecom also provides very attractive yield for investors that want to have some income.

And we just have a few seconds left, but what are some of the potential long-term implications for the sector amid this COVID crisis?

- I think there are two areas worth watching. One is regulation, and second optimization of cost structure. So from regulation perspective, it was a headwind for the industry for a number of years. Now, we realize that this is really important, essential service, and people realize that they get a lot of value for the money that they spend on their broadband wireless bill. So it's still early days, but I hope that government policy will change, will be more pro-investment, pro-business.

And secondly, from cost perspective, a lot of companies in the industry are now thinking about the ways they operate. So for example, do they need those hundreds or thousands of stores that they have across the country? Do they need all the employees to work in downtown offices? Or maybe some employees will work from home after COVID, as well, and save on rent in that way.

And another big area is it's a mature industry where everybody has phones, for example, but the companies in the industry have been always fighting for each new subscriber, providing those big subsidies and spending a lot on marketing and promotions. Maybe they don't have to do that. Maybe they can live in lower churn environment. Then they don't chase the next subscriber. So it's still very early days, but I think there are a lot of opportunities for companies to cut costs and adjust the way they do business.

- Andriy, thank you.

- Thank you very much.

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