Many investors are watching the saga of BCE (TSX:BCE) as the stock enters the second year of its downtrend. The telco has been in the headlines as it grapples with high interest rates, significant capital spending on 5G infrastructure, rising competition from industry consolidation, falling data prices, and regulatory tussle. It sent BCE stock into a two-year-long downtrend from its peak of above $73 in April 2022 to its 10-year low of around $44, a 39% dip.
As the stock enters the third year of the downtrend, it has made investors apprehensive, making you wonder how low it can go.
BCE stock has troubles
On March 11, S&P Global downgraded BCE’s outlook from stable to negative as it is worried elevated debt ratios of 3.5 times and intensifying competition could reduce the company’s financial flexibility. Since the downgrade, BCE stock has slipped 9%. The debt ratio indicates that BCE’s long-term debt is 3.5 times its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Even BMO Capital Markets downgraded BCE shares as it sees growing competition from Quebecor. Moreover, advertising challenges in BCE’s media segment might put downward pressure on the stock.
Should you be worried about BCE stock price going below $45?
No business is without risk. The industry’s transition to 5G and weak macro environment has created short-term headwinds. This isn’t the first time BCE faced a downgrade. Moody’s downgraded BCE in 2000 when it acquired CTV and in 2006. And in both instances, BCE’s dividends were affected in the short term. However, the stock recovered and made up for the slow or reduced dividend with strong dividend growth.
And BCE is not alone in its troubles. Rogers Communications also got a ratings downgrade when it acquired Shaw Communications. However, S&P Global revised the outlook from negative to stable after it was assured that Rogers could reduce its leverage ratio to 4.5 times by 2024 and near 4.0 times by 2025.
S&P Global’s negative outlook means it will be watching BCE’s debt. And even before the ratings agency warning, BCE has started work on deleveraging its balance sheet.
- It is slashing 4,800 jobs to save operational costs.
- It is selling non-core assets to reduce debt. The only concern is the timing of the asset sale.
- The company has even reduced its capital spending for 2024 and slowed its dividend-growth rate.
BCE’s rising interest expense could ease once the Bank of Canada begins interest rate cuts.
However, falling internet prices from rising competition is hurting its revenue. This price competition is not sustained as lower prices will hurt other telcos. In the long run, prices will stabilize as going below a particular price point would hurt profits.
While these headwinds have made analysts reduce their BCE price target, none expects dividend cuts. Neither BMO nor S&P warned of a dividend cut.
How low can the stock go?
After a 40% dip, investors wonder if BCE stock price can fall to $40, the level last seen in 2012 when the 4G era began. I will not rule out that possibility. However, the truth is that the market is unpredictable. Timing the market won’t work in the case of BCE.
If the telco pauses dividend growth, a further downside is likely. However, the interest rate cut announcement could send the stock price up. And the market expects the first rate cut to come in June.
Recently, BCE came under fire for its bosses got handsome bonuses while the company slashed 4,800 jobs. However, the bonus was for achieving 2023 free cash flow, profit, and revenue targets, which it missed by a slight margin. The executive bonus could take a hit in 2024 when the company expects free cash flow to fall as much as 11%.
2024 is the year of transition for BCE. If you are in it for the long term, BCE could be a value play for dividend seekers. The right way to invest in this stock is to make small monthly investments throughout the downturn and reduce your average cost per share.
