A High-Yield Opportunity From The Northern Frontier
A friend got me hooked on the show Letterkenny. I’m not really a binge TV-watcher, but I made an exception in this case. The 9th season was just released, and I devoured it in two or three days. The award-winning sitcom is said to be loosely based on the creator’s hometown in southern Ontario and follows the exploits of a quirky and colorful cast of rural Canadian characters.
The adult-themed humor isn’t for kids, but the show features some of the wittiest dialogue you’ll find anywhere. I’ve only had the pleasure of visiting Canada once (a quick trip to Victoria), so the show has given me a newfound appreciation for our neighbors to the north.
As you’ll learn in a minute, Canada has more to offer than funny TV shows – especially to investors.
Longtime readers of my premium High-Yield Investing service may recall that my predecessor had a knack for finding profitable income-producing Canadian securities. Over the years, our readers have been introduced to an array of Canadian banks, energy trusts, and real estate firms.
Just recently, we returned to our roots by adding a Canadian company to our portfolio – this time, in the telecom field. (Don’t worry, it trades as an ADR here in the states. I explained how ADRs work in this piece.)
As I always say, it pays to expand your horizons and look beyond the usual suspects. And when you understand just how impressive the Canadian telecom industry is, you’ll see why…
Canada’s Telecom Industry
Let’s just say that Canada has fully embraced the digital age. There are now more than 32 million activated smartphones in the country and about 31 million adults over the age of 18. That’s an impressive penetration rate. While Canada’s massive geographic landmass is largely wild and untamed, advanced 4G and 5G mobile networks blanket 99% of the population and 86% of the major roads and highways.
Almost all of those mobile subscriptions include a data plan. The average user gobbles up more than 2 GB of data per month – an increase of 30%+ over the past three years. Hungry appetites for data have driven average revenues per user (ARPU) to nearly $70 per month, versus capital expenditures per user of less than $7.
According to the Canadian government, mobile revenues topped $25 billion for the first time in 2018 and continue to grow.
And that’s just one piece of the telecom pie.
Nearly 9 in 10 Canadian households have broadband internet connections. Residential subscriptions are growing at three times the pace as the overall population. As download speeds increase, residential internet revenues have eclipsed $11 billion per year.
Of course, Canadians are just as fond of television as we are. The average person spends about 30 hours per week watching their favorite news, sports and shows. Many are taking advantage of new internet-based video services. But traditional television still accounts for 89% of the viewing hours, versus just 11% for streaming.
Put another way, Canadians watch about 8 times more traditional TV than online TV. And that feeds a steady stream of revenue to cable and satellite providers – about $6.5 billion per year, with ARPU of $65 to $75 depending on the provider. Conventional television stations rake in another $7 billion annually from advertising income and other broadcasting revenues.
Canadians are also fond of the radio, tuning in about 15 hours per week on average (22 if you include audio streaming services). The country hosts 712 commercial radio stations, not counting the 67 affiliates of the Canadian Broadcasting Corporation (CBC). Combined, these stations take in $1.8 billion in yearly advertising revenues – pocketing an EBITDA margin of close to 20%.
My Plan To Cash In…
Add it all up, everything from local and long-distance phone to wireless and internet to satellite TV, and Canada’s vibrant telecom market hauls in nearly $70 billion a year. And a good chunk of that is returned right back through dividends.
For investors, there is good news and bad news here. On the downside, growth in this mature industry is hard to come by. Mobile revenues have been advancing in the low-to-mid single digits, while broadcasting has been sliding at a similar pace.
On the plus side, industry consolidation has concentrated all the wealth into the hands of an oligarchy. The five largest groups control 65% of the radio market, 75% of internet subscriptions, and 89% of television broadcasting. The “big three” Rogers Communications Inc. (RCI), BCE (BCE), and Telus (TU) dominate 92% of Canada’s wireless industry.
Now, if you’re interested in any of these names, then I encourage you to research them further. Each has shares listed on American exchanges, and all of them offer yields that far exceed what the average S&P 500 stock offers.
But my favorite offers exposure to multiple telecom and adjacent sectors that should appeal to income investors. We’re talking about a powerhouse telecom giant that dominates the nation’s lucrative wireless market, in addition to high-speed Internet, television, cable networks, video streaming, original films, radio stations, not to mention a chain of popular retail stores.
Can you picture all of that under one corporate roof? Then throw a 6% yield on top of it. That’s essentially what we’re talking about with my latest pick over at High-Yield Investing.