The Bank of Canada recently lowered interest rates by 0.25% and the United States is expected to start reducing interest rates later this year or in early 2025. The drop in borrowing costs could spark a return of investors to Canadian telecom and bank stocks that declined as rates rose through 2022 and 2023.
BCE
BCE (TSX:BCE) is Canada’s largest communications company, with a current market capitalization of nearly $41 billion. The stock trades near $44.50 at the time of writing compared to $74 at one point in 2022.
The steep decline surprised long-term holders of the stock. BCE trades close to a 10-year low, and some pundits speculate that the dividend could be at risk of being cut.
At the current share price, the dividend yield is 9%. When dividend yields get this high the market could be signalling concerns that the distribution is not sustainable. No dividend is 100% safe, but BCE’s payout should be okay, given the financial outlook.
BCE expects 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be similar to 2023 or slightly higher. The company cut 6,000 positions over the past year to reduce expenses. BCE also sold or closed unprofitable radio stations and trimmed TV programming to stabilize the media division.
Lower borrowing costs in 2025 will free up more cash to reduce debt and support the distribution. BCE remains a very profitable company, and management raised the dividend by 3.1% in 2024, so the payout should be safe as long as there isn’t a meaningful revenue decline in the next couple of years.
This is a contrarian pick, but there is good upside potential next year if interest rates continue to slide and BCE’s cost cuts deliver anticipated benefits to the bottom line.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) trades near $62.50 at the time of writing compared to $93 in early 2022. Rising interest rates are to blame in this case, as well. Investors worried that the Bank of Canada and the U.S. Federal Reserve would have to drive the economy into a recession to get inflation under control. Businesses and households with too much debt are already struggling to cover the jump in borrowing costs. An economic decline would potentially lead to more business failures and drive up unemployment, which would be bad news for families with high debt levels.
Bank of Nova Scotia reported a provision for credit losses (PCL) of $1 billion in the fiscal second quarter of 2024 compared to about $700 million in the same period last year. If interest rates continue to fall in the coming months and through next year the PCL in coming quarters should top out and start to decline.
Economists broadly expect the central banks to navigate a soft landing for the economy. Assuming that turns out to be the case, BNS stock is probably oversold right now.
Investors who buy at the current level can get a dividend yield of 6.75%, so you get paid well to wait for the recovery.
The bottom line on undervalued dividend stocks
Additional downside is certainly possible, but BCE and Bank of Nova Scotia already look cheap and offer attractive dividend yields. If you have a contrarian investing style and are searching for high-yield picks, these stocks deserve to be on your radar.
