In today’s edition: a Scotiabank analyst thinks BCE should freeze its dividend after a big fiber-to-the-home-related spending spree; Goldman Sachs highlights the impossibility of keeping up with the market without owning tech stocks; and a fascinating column discusses the importance of unquantifiable disorder in making citizens uneasy in public spaces.
BCE Inc. headquarters in Montreal.Christinne Muschi/The Canadian Press
Telecoms
Analyst warns BCE against raising dividend
BCE Inc. (BCE-T) yields 8.4 per cent, the third highest in the S&P/TSX Composite behind Superior Plus Corp. (SPB-T) and Allied Properties REIT (AP-UN-T). Yields this high relative to government bonds are historically reserved for companies under pressure but no sensible analyst is predicting anything calamitous for one of the country’s most prominent oligopolists.
Scotiabank analyst Maher Yaghi, however, believes the company needs a period of balance sheet recovery, one that precludes further dividend increases. The recent sale of MLSE for about $4.1-billion after tax is not enough to repair the balance sheet in his estimation and he further adds that one-time, non-core asset sales should not affect payout decisions.
Management expects that dividend coverage at current levels will fall to 99 per cent of reported free cash flow (FCF) by 2026, down from this year’s 127 per cent. But Mr. Yaghi’s calculations of true FCF, once adjustments for (entirely legal and conventional) accounting at BCE are made, suggest a current dividend payout ratio of roughly 200 per cent.
The analyst has no issue with the fiber-to-the-home business strategy that led to the company’s recent spending binge. Mr. Yaghi writes, “We believe that this investment has future proofed the company and even repositioned it for growth in the long term.” On the other hand, he doesn’t think they should have been raising the dividend during the period.
I don’t usually focus on individual companies but there are reasons I’m interested here. My non-sports watching of network television is exactly zero hours per year, so I’m interested in what happens with domestic telecom business plans when the older generations who dominate the network audiences aren’t around anymore. Will they sell content at all, or just provide the dreaded (by them) dumb pipe of internet access and let Netflix collect all the profits?
There is also the question of domestic oligopolies themselves, whether in telecom, banking, grocery stores or airlines. Former Bank of Canada governor Stephen Poloz has been traveling the country warning about declining productivity in the economy and it’s hard to argue that the ‘we’ve only been (occasionally) competing against ourselves for the past century’ oligopolistic environment is helping any in this regard.
DADO RUVIC/Reuters
Markets
Tech is 40 per cent of U.S. equity returns since 2010
The weekly Briefings newsletter from Goldman Sachs featured some remarkable statistics about technology, as part of chief global equity strategist Peter Oppenheimer’s argument that AI stocks are not another tech bubble.
Avoiding technology stocks in the years after 2010 would have seen portfolios killed. Tech stocks have generated 32 per cent of global equity returns and 40 per cent of U.S. equity returns since then. Global technology stock profits have climbed 400 per cent since pre-financial crisis peaks compared with an average of 25 per cent for all other sectors. These trends justify tech stock outperformance and does not represent rampant speculation, according to Goldman Sachs.
Mr. Oppenheimer admits that the S&P 500′s current concentration in technology stocks is a risk to investors, and does recommend diversification. In addition to holding tech companies, his suggestion is to buy old economy stocks that will benefit from government infrastructure spending.
Goldman Sachs thinks we are entering a stage where AI-related profit growth spreads from the dominant hyperscale companies like Amazon.com, Microsoft and Nvidia to “a new wave of tech superstars” that develop new products using AI and machine earning. Inconveniently, he does not provide the names of stocks that might be these superstars but I will be watching for future reports.
Diversions
Rising ‘disorder’ threatens advantages of city living
Public policy expert Charles Fain Lehman offered an explanation for why people believe crime rates are spiking while violent crime rates have actually been falling: the U.S. is suffering from an epidemic of what he calls disorder.
The column grants that disorder is a difficult concept to fully define but it includes increases in homelessness, littering, shoplifting and public drug use. The trend includes driving, where U.S. road deaths have climbed as total vehicle miles driven have declined, suggesting more irresponsible driving.
Mr. Lehman described something that matches my personal experience, where we are seeing a more defensive and hostile attitude among retail workers like coffee shop baristas. He writes, “This is, I suspect, because they are dealing with people who steal, cause a ruckus, or shoot up in the bathroom—disorderly behaviors that they have to deter before they cost them customers.”
The column includes an important reminder concerning public spaces. He writes, “Cities’ comparative advantage is agglomeration and network effects: concentrating people in one place can create innovation that yields more than linear returns. But that only is possible if people have shared public spaces in which to interact.”
I was very much struck by this piece and highly recommend reading the whole thing.
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
Globe Investor highlights
David Berman reports on how the federal government’s relaxed mortgage rules unveiled this month could be great news for banks. Meanwhile, Tim Shufelt tells us why it’s time to get obsessed (again) with dividend stocks in general.
Larry MacDonald profiles a couple who made some big bets on energy stocks and wound up with a $2-million TFSA bringing in $15,000 in tax-free dividends every month.
Our monthly report on short sellers and the TSX stocks they’re targeting the most.
Looking to expand your exposure to bonds? Both Rob Carrick and Gordon Pape have some thoughts on ETFs to load up on.
Fear of missing out has returned to a suddenly hot Chinese stock market.
What’s up next
The S&P Global Canada Manufacturing PMI results for September will be out Tuesday. The August report was only slightly in contractionary territory at 49.5 (above 50 is expansionary).
The U.S. data calendar is busier, starting with the ISM Manufacturing PMI out on Tuesday. Consensus is looking for 47.7 which will still indicate contracting activity. Despite the U.S. economy’s focus on services, manufacturing data have been more correlated to earnings growth.
Durable goods orders will be released on Thursday and everyone’s favourite data point, non-farm payrolls, will be reported Friday. Economists expect 130,000 net new jobs.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)