Is Cable Obsolete?

Written by Paul Siluch
October 14, 2022

Here’s a question. Is cable TV obsolete? You’d think so, based on the prices of shares in many of the companies in this sector.

Here’s Rogers (TSX RCI.B), down 30 per cent.

Comcast (NYSE CMCSA), one of the U.S.’s largest cable operators, is down 51 per cent in the last 12 months.

Even Telus (TSX T), which offers phone, internet, and TV services, is down 20 per cent.

Verizon (NYSE VZ) is down 32 per cent.

While cable TV has been impacted by streaming services like Netflix (NASDAQ NFLX), the cable companies make a huge portion of their money from internet services. Who can do without these today, and how many companies supply them?

In Canada, Shaw Communications (TSX SJR.B) was unable to keep up with demands for faster and faster speeds and so is selling out to Rogers. This leaves just three large operators nationwide providing most of the internet “backbone”.

They are almost regulated monopolies in terms of where we buy our internet access. And most offer TV and cell phone services as well. Also modern necessities.

So why have they gone down? By their nature, telephone companies have to borrow and spend a lot of money. Borrowing is now more expensive, which means profits will decline. How much? Hard to say. But they will adjust by slowing down their upgrades and by raising their prices. They have done this in the past and will do it again.

The opportunity, however, is in the yields.

• Telus has averaged a dividend yield of 4.4 per cent for years. It pays five per cent today.
• Verizon has averaged 4.3 per cent and now yields over seven per cent.

Some of these companies may be forced to reduce their dividends for a space of time. This is more often a time to buy the shares than sell them, for there is a big reaction to a cut. Still, many of these giants are already down so far, much of this could be already priced in.

The pipeline stocks are in a similar boat.

After a 24 per cent decline in its share price, TC Energy (TSX TRP) - the old TransCanada Pipelines - yields 6.6 per cent. It averaged about four per cent for many years.

Are pipelines going away?

We are in a bear market that is not yet over. Some say we have another 15 per cent to drop, and this is not unreasonable if rates climb as high as the Fed threatens. Real estate may fall further. Again, it depends on rates.

Remember what just happened in England, though. They stopped hiking and started buying bonds again because of the turmoil in their markets.

They want to raise rates further. They tell us they are going to. But they can’t.

The decline in stocks isn’t just beginning. It has been going on for almost a year now.

Bank of America showed that $88 billion moved to cash last week. It came from bonds and stocks. Bullish sentiment is at all-time lows. Even as we approach the best time of the year to own stocks.

Today, we have six stocks in our portfolios that yield close to five per cent and above. This is up from one a year ago. And there are far more in the general market.

I remember in 1991 when Bank of Nova Scotia (TSX BNS) hit the six per cent yield level during the 1990-1991 recession. It pays 6.4 per cent today.

Yes, it is the weakest bank today, but the Canadian banks as a group are historically bargains at these levels.

TV is not obsolete. Nor are cell phones, pipelines, and banking. And yet the shares trade like they are going out of business. They are not. Interest rates will peak, and we will be kicking ourselves for not buying many of these high-yielding stocks when they were on sale.

And we have ignored one of the best performing and highest yielding sectors: energy. Many oil and gas companies are becoming completely debt-free and are boosting dividends with the extra cash.

In a typical recession, oil demand flattens but doesn’t decline. Some see oil heading back to $100 per barrel by the end of the year, which means this hated sector will be even harder to ignore as profits climb even further.