BCE Inc. (BCE-T) is a member of the S&P/TSX Canadian Dividend Aristocrats Index, and aggressively so. The basket of stocks is reserved for companies who’ve simply raised their dividends, by any amount, in each of the past five years. BCE has far exceeded the minimum standard, choosing to hike payouts by 5 per cent annually for a decade.
It’s all over now, baby Bell.
BCE’s underwhelming 2023 results have forced the company’s board to dial back the dividend growth to 3.1 per cent for 2024. But cutting the dividend, not increasing it, would be the responsible thing to do – because BCE simply hasn’t been generating the cash to cover it.
There’s plenty of ways to measure dividend payout rate. What is it as a percentage of net income? Or EBITDA, the earnings before interest, taxes, depreciation and amortization? Or some measure of cash flow, particularly for a capital-heavy business such as BCE? And, importantly, what’s the right amount of profits or annual cash generation to send to shareholders? A range of 50 per cent to 75 per cent is optimal.
In pretty much any of these payout measures, however, BCE is uncomfortably above TELUS Inc. and Rogers Communications Inc., its peers. And by most of them, BCE is making unsustainable payouts.
The company’s 2023 dividends equalled 162 per cent of reported net income, the fourth straight year above 100 per cent and the 11th straight year above 80 per cent, according to S&P Global Market Intelligence. BCE’s dividends also exceeded the company’s free cash flow, or FCF – an estimate of cash flow after capital expenses, as calculated by S&P – in seven of the last nine years, including a 130-per-cent payout rate in 2023.
By S&P’s count, BCE has generated $25.8-billion of FCF since the end of 2012 and paid $29-billion in common dividends. And debt has nearly doubled since the end of 2013, to $34.4-billion.
This, understandably, isn’t how BCE presents it. The company has its own definition of FCF that has historically excluded an awful lot of things.
Spokesperson Ellen Murphy notes there is no standardized definition of free cash flow in the telecom industry, but says her company’s definition “is the most straight-forward among peers” and aligned to accounting standards. As BCE sees it, its last two payout rates were 111 per cent in 2023 and 108 per cent in 2022, which Ms. Murphy says “is higher than our policy range” because of elevated capital expenditures from “generational investments in our networks.”
Even the BCE bulls – and there are still a few – acknowledge that the decade of dividend growth has pushed the company’s current payout rate to an uncomfortable level. They think this issue is temporary.
But there are now plenty of folks who are deeply skeptical BCE can continue these payouts.
The dean of the doubters is likely Mark Rosen at Accountability Research Corp., who has been questioning BCE’s financial reporting, and health, for nearly a decade. In 2016, I wrote a column noting Mr. Rosen’s issues with how BCE was excluding acquisition costs and voluntary contributions to its employee pension plan from free cash flow. (They are practices that continue to this day.)
It’s fair to say investors brushed off the concerns, allowing the board to continue its dividend rampage. By the time of BCE’s most recent earnings, Mr. Rosen bemoaned “shareholder apathy and inertia regarding BCE’s weak free cash flow outlook.”
Yet he is not a lone voice in the wilderness. Desmond Lau at Veritas Investment Research Inc. and Vince Valentini of TD Securities Inc. have homed in on BCE’s accounting for the leases it uses for its satellites and other heavy equipment.
If BCE were to buy this equipment, the cash it spent would show up in capital expenditures, and hurt any FCF measure. Instead, since it leases them, most of the costs flow through the “cash from financing” portion of the cash-flow statement – appearing nowhere near any calculation of FCF. In 2021 and 2022, BCE reported a “cash outflow related to leases” between $1.2-billion and $1.3-billion; less than $400-million of that appeared in the income statement.
Mr. Lau has been subtracting $800-million from BCE’s FCF number to reflect these leasing costs: For example, BCE’s 2024 guidance for FCF is a range from $2.79-billion to $3.06-billion; Mr. Lau’s math is for FCF of $1.99-billion to $2.26-billion. With dividends assumed to be $3.64-billion, Mr. Lau estimates a 2024 payout ratio of as high as 183 per cent.
Mr. Valentini, of TD, discovered BCE’s lease outflows in September of last year in a financial-statement footnote, cut his rating on the stock and apologized to clients for what he called an “historic oversight.” He said “our new FCF estimates raise serious questions about dividend quality and dividend sustainability.”
And Patrick Horan of Agilith Capital says he’s shorting BCE simply because he doesn’t believe the company can cut back meaningfully on its current levels of capital spending. He says the telco industry is accelerating its technology, spending in order to save their existing subscribers.
“They’re on the treadmill to hell right now,” Mr. Horan said. “They have no choice. This dream of low capital intensity just isn’t around the corner and it’s never going to be.”
BCE’s Ms. Murphy says the company “reports capital lease repayments as a financing activity below free cash flow, which is in-line with accounting standards,” adding that “the disclosure is clear in our financial statements.” She also says “we appreciate that our shareholders want a stable and growing dividend, and we have been delivering consistently on that expectation.”
If the company’s leaders were prudent, they’d accept the new reality and realize a reset is in order. The aristocratic era of BCE dividends is over, because its cash flow makes it a commoner now.
David Milstead