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There is an old investing adage that warns not to put money into companies that are heavily regulated. The argument says that investors can never foresee the political winds that will inevitably blow through a sector, changing the rules for making money and the rationale for owning a stock.
The benefit of holding a stake in the Canadian telecom giants has been very clear the last few years. They generate huge amounts of cash, pay big steady dividends, face limited competition and are reaping the rewards of new wireless technology. Investors have done remarkably well owning the shares of Rogers Communications, Telus Corp. and BCE Inc. over the last three years. But many people probably had no idea of the political risks their investments carried.
A series of policy decisions made in Ottawa have opened the door on Canada's cozy telecom sector to Verizon Communications, a global giant with financial resources and marketing might that dwarfs those of Rogers, BCE and Telus. The share prices of the trio have tumbled over the last two days on rumours of Verizon's Canadian ambitions.
If Verizon proceeds with a purchase of one of the country's start-up wireless firms and stays committed to the market, the incumbent players will face a rival that boasts best in international class practices and unsurpassed purchase pricing power. The New York-based telecom, with sales last year of $115.8-billion (U.S.), could quite literally buy its way into the market, discounting prices to win customers without doing noticeable damage to its own bottom line.
How quickly the view has changed for so many investors seeking a high-yielding stock in a perceived haven. And there will be further changes ahead orchestrated by politicians and bureaucrats in Ottawa. The government has scheduled the next auction of wireless spectrum for January. It will likely set the rules for that auction in September, including the critical point of how soon after purchasing spectrum a company will be allowed to resell it.
For investors, the devil will be in the details. They probably have the same pit in their stomachs that Enbridge and TransCanada Inc. shareholders feel as they await government decisions on key pipelines that could eventually redefine these companies' business models.
A little more than three years ago, investors were extremely uncomfortable about U.S. health care stocks in the run up to Obamacare, the sweeping $940-billion bill passed in 2010 to reform the sector. Today, U.S. health care stocks have been one of the best performing classes of stocks on the S&P 500 Index. Investors should enjoy the riches now, because there's no telling what new government action could bring upheaval to their world tomorrow.
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