BCE (TSX:BCE), one of Canada’s oldest telecom companies, has been in the news for quite some time. The company is slashing 4,800 jobs, leading to the cancellation of several news shows at a time when the government is trying to promote local journalism. It has even caught the attention of Prime Minister Justin Trudeau. Add to this the 40-year-high interest rate of 5%. The stock has slipped 37% from its April 2022 high. Two-plus years of a downtrend have got fundamental investors concerned about BCE. Is this dip a buy or a value trap?
Understanding the impact of BCE’s stock price decline
BCE spent $19 billion in capital between 2020 and 2023 to build 5G infrastructure and take the lead here.
Regulatory uncertainty
Suddenly, in November, the Canadian Radio-television and Telecommunications Commission (CRTC) asked BCE to give competitors access to its network. BCE is strongly opposing the regulatory intervention by slashing jobs and reducing capital spending on the fibre-optic network in 2024. All this noise and uncertainty has negatively affected the stock price and has been the major cause of the 15% dip in 2024.
While the BCE and regulators tussle continues, the telco is once again restructuring its business for the future of communication. Firstly, it is reducing its exposure in highly regulated areas that generate lower returns. Hence, it is selling 45 of its 103 regional radio stations.
In a dialogue with the CRTC in February, BCE suggested giving competitors conditional access to its fibre networks:
- Access to speeds of only up to 1.5 gigabits per second
- Access to the fibre-to-the-premises only after five years of deploying the network in that area
Such conditional access will reduce the negative impact on returns on investment. There has been no update on the matter since then. This uncertainty is making investors anxious. Depending on what the CRTC decides, BCE can analyze the monetary impact of it and work around a way to overcome it.
Interest rate impact
Another uncertainty that is pulling down BCE’s stock price is the interest rate. Before 2024, the stock fell 25% between April 2022 and December 2023 as accelerated interest rate hike significantly increased interest expense. Remember, the company increased its debt to fund the $19 billion capex. BCE’s interest expense increased 24% to $1.49 billion in 2023, which affected its net profits.
Economists have been expecting a rate cut since March. However, the Bank of Canada kept delaying it as the gross domestic product and employment continued growing. While inflation has fallen below the bank’s target of 3% for the fourth straight month, the bank has remained cautious in cutting the rate.
There is only a 60% expectation of a rate cut in June. Capital Economics deputy chief North American economist Stephen Brown expects the bank to delay the rate cut to July. This delay could mean a slower-than-expected rate cut in 2024. Every 1% interest rate equates to millions in interest expense.
The longer the interest rate remains high, the more stressed BCE’s free cash flow will be. The company already paid 113% of its free cash flow in dividends, which means it used its reserves to fund dividends. Any interest rate cut could positively affect BCE through significant savings on interest.
Is BCE a buy-the-dip stock or value trap?
2024 is the year of transformation for BCE as it is reducing its exposure in radio and other low-return businesses and investing in new growth avenues like cloud and security services and advanced advertising. The telco is still leading in the 5G race and is well-placed to tap the opportunity. The market has already priced in the risks and the dip in 2024 free cash flows.
This dip is a time to buy the stock. I may not rule out the possibility of an impact on BCE’s dividend. However, this setback will be temporary till the new investment starts yielding returns. The company could reward its shareholders for sticking with it by accelerating dividend growth.
