A cyclist passes BCE Inc.'s headquarters in Montreal on Aug. 3, 2023.Christinne Muschi/The Canadian Press
BCE Inc.’s BCE-T bombshell announcement on Thursday that it will terminate 4,800 positions was a dismal development that coincided with a steep drop in quarterly profits at the telecom giant. But for investors, the biggest source of concern was the company’s miserly dividend hike.
The 3.1-per-cent increase – 12 cents per share on an annualized basis – is a step down from the usual annual bump of more than 5 per cent and sends a clear message: Investors should be prepared for a tough slog ahead.
“They are signalling a more competitive environment. Looking at the growth trajectory, it’s going to be lower than in the past,” Laura Lau, chief investment officer at Brompton Funds, said in an interview.
This is disappointing for dividend-focused investors, because a bet on BCE is essentially a bet on the dividend. (Full disclosure: I purchased shares last year.)
That’s because the company is saddled with fading assets, such as wireline phone networks and radio stations. It is battling for wireless customers in a slow-moving mature market.
And according to Mirko Bibic, BCE’s chief executive officer, the telecom is also suffering from a difficult regulatory environment that is undermining its networks and competitive position with global tech giants.
Gone, then, are the days of exciting growth that once drove impressive stock rallies. But investors may not want to abandon hope.
From 1998 through 2015, the shares delivered total returns – including dividends – of 13.7 per cent a year, on average. That was more than double the pace of the S&P/TSX Composite Index over the same period (also including dividends).
Since then, BCE has floundered. Eight years ago, the shares traded at $58.23 in Toronto. On Thursday, they closed at $51.08, down 3.8 for the day. Without a dividend – which has risen to $3.99 per share, up from $2.60 in 2015, for a cumulative increase of more than 53 per cent – long-term investors would have nothing to show for their devotion.
Now, even BCE’s dividend growth is looking fragile. Part of the problem here is that the telecom has been distributing more money to shareholders than it has been generating in terms of free cash flow or earnings, driving a payout ratio that is now well above 100 per cent.
An outright dividend cut, which would be devastating to the share price, would offer a grim solution to this problem. But the more likely approach is a steadily declining growth rate. The annual dividend hike could subside to 2 per cent or even less over the next few years, according to Ms. Lau.
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Adam Shine, an analyst at National Bank of Canada, said in a note on Feb. 4 that BCE’s heavy debt load and high dividend yield were points in favour of a taking a “prudent” approach to the dividend. He had been expecting an increase of 3.5 per cent, which is in line with BCE’s actual hike.
Although BCE’s dividend prospects aren’t what they used to be, investors have a few compelling reasons for taking a closer look at the stock.
The current dividend yield is 7.8 per cent, based on the latest payout. Even without further increases, the yield alone compares favourably with the long-term average returns for major equity benchmarks. In other words, BCE’s dividend yield alone offers an attractive return.
It’s not outlandish to bet on a modest stock price recovery either. Telecom stocks are known as bond proxies because they often track government bonds. With bond prices down substantially over the past two years, which has sent yields soaring to multiyear highs, telecom stocks have followed suit.
Now, with bond yields off the boil as inflation subsides, BCE’s shares could rally simply to keep up with a recovery in the bond market.
Finally, BCE’s prospects might not be as terrible as the layoffs suggest. Analysts had been anticipating cost-cutting as BCE – and its peers – adjust to competitive pressures emanating from industry consolidation, after the sale of Shaw Communications and Freedom Mobile last year.
“Revamping the cost base has become an imperative for BCE as service revenue growth has seen significant pressure in recent quarters,” Maher Yaghi, an analyst at Bank of Nova Scotia, said in a note.
The case for buying the stock rests on BCE becoming a leaner, more competitive player that will generate more cash to sustain its dividend. The stock price is down, but the bullish case is alive.