After a two-year-long downturn, BCE (TSX:BCE) stock is showing signs of recovery. This telecom stock fell almost 39% to its 10-year low of $44, making even long-term investors wonder how low it could go. The stock saw a recovery of over 5% in the last 30 days. Does it mean the stock has bottomed out? While it is difficult to say if this rally is a recovery or just a temporary jump before another dip, it is a sign to load up on BCE stock.
Why has BCE stock been on a downtrend?
BCE stock has been falling for three reasons:
- Rising interest rates have made its debt expensive, putting pressure on its free cash flow (FCF). Thus, its dividend payout ratio was 113% of FCF in 2023.
- The Canadian Radio-television and Telecommunications Commission (CRTC) released a wholesale mandate in November 2023, asking BCE and Telus to provide competitors access to their network at wholesale rates. While the telcos oppose this mandate, it has made investors bearish as it could impact the long-term cash flows of telcos and pause or slow dividend growth.
- BCE has been in the news for significant job cuts as it restructures its business. The company is shutting down several radio stations and electronics stores.
Why am I bullish on BCE stock?
While the above three factors are affecting BCE’s net income and FCF, its long-term secular trend of 5G remains intact. BCE is expanding its exposure to cloud services and digital ads. These segments could flourish as the 5G adoption leads to the Internet of Things (IoT) proliferation. Multiple devices, from cars to cameras to drones to robots, will be connected to the cloud, creating more avenues for generating cash flows.
Moreover, the interest rates will eventually decline as such high rates could hurt economic growth. BCE could restructure its debt and improve its credit ratings when interest rate cuts begin. In March, S&P Global downgraded BCE’s outlook from stable to negative due to elevated debt ratios of 3.5 times and rising competition.
As for the regulatory risk, BCE and Telus are working with the CRTC to find a middle ground that encourages competition without affecting returns on network investment. Large carriers spend billions of dollars on building network infrastructure to provide connectivity to the vast geography of Canada.
In a February discussion, BCE and Telus proposed some conditions to the wholesale mandate.
- BCE proposed that it will give competitors access to speeds of only up to 1.5Gbps and fibre-to-the-premises only after five years of deploying the network in that area. This delay would help reduce the negative impact on investment returns.
- Telus proposed that the wholesale mandate should not apply in rural and remote areas, high-cost buried fibre areas, and areas where they serve.
While the above measures do not promote competition, they open a discussion to work on a settlement.
Should you load up on telecom shares?
After analyzing the negatives and positives of the telecom sector, the short-term headwinds are still persistent and could pull down the stocks after a short rally. However, long-term secular trends from the 5G opportunity indicate that BCE will continue to pay the current dividend per share for another decade. Maybe it might pause its dividend growth for the next three to four years till it builds out new cash flow streams from its telco to techno restructuring (cloud, digitization, and more).
A 10-year low stock price is a once-in-a-decade opportunity to lock in an annual yield above 8%. If you keep loading up your BCE shares throughout the downtrend, you could reduce the average cost per share. Once the regulatory uncertainty subsides, the stock will return to a recovery rally, creating an opportunity for 30-40% capital appreciation.
