In the past two weeks we have looked at two of Canada’s leading blue chip stocks, leaders in the telecom industry: BCE aims for faster networks, higher dividends and $27 billion investment in networks paying off for Telus. Today, we look at another telecom we follow for our subscribers, Manitoba Telecom. The Allstream acquisition the company made in 2004 to give it a national presence has lost money in recent years. However, Manitoba Telecom has now completed a strategic review of its operations, and its shares have risen in the wake of that review. 

Like Telus and BCE, Manitoba Telecom is speeding up its networks to profit from demand for faster downloads—both through high-speed Internet and wirelessly.

Manitoba Tel can easily afford to make these investments and maintain its dividend. However, we feel BCE and Telus are better buys right now.

MANITOBA TELECOM SERVICES INC. (Toronto symbol MBT; www.mtsallstream.com) gets 60% of its revenue from its MTS division, which has 1.3 million telephone, wireless and TV customers in Manitoba. The other 40% comes from Allstream, which sells phone and Internet services to businesses across Canada.

The company recently completed a strategic review of its operations. As a result, it now plans to cut 25% of Allstream’s workforce and reduce the subsidiary’s capital spending by 20% to 30% in 2015. These moves should save Manitoba Telecom $50 million annually by the end of 2016.

In addition, the company will contribute $120 million to its underfunded employees’ pension plan, eliminating the need for additional payments over the next two years. It has also cut its dividend by 23.5%: the new annual rate of $1.30 a share yields 4.5%.

Meanwhile, Manitoba Telecom earned $26.7 million, or $0.34 a share, in the three months ended March 31, 2015, down 36.3% from $41.9 million, or $0.54 a share, a year earlier.

Blue chip stocks: Gains in wireless, high-speed Internet and TV customers offset losses in traditional phone service

The decline in earnings mainly stems from $11.5 million in Allstream severance costs and $1.7 million of other restructuring charges. Overall revenue improved 1.6%, to $408.0 million from $401.5 million.

Revenue at the MTS division rose 2.9%. The company ended the quarter with 501,195 wireless subscribers (up 0.4%), 219,198 high-speed Internet users (up 4.0%) and 107,863 TV customers (up 1.4%). These gains offset weak demand for traditional phone services. Allstream’s revenue fell 1.2% as it continues to phase out its older networks and expand high-speed Internet service.

Manitoba Telecom’s long-term debt of $873.3 million is a high, but manageable, 38% of its market cap. It also holds cash of $10.1 million.

The stock is up 13% following the strategic review, partly because the plan makes a takeover by a larger telco, like BCE or Telus, more likely. That’s largely why Manitoba Telecom trades at a high 23.6 times the $1.23 a share it will likely earn in 2015.

Recommendation in The Successful Investor: a worthwhile HOLD