1 Stock to Steer Clear of

BCE stock (TSX:BCE) has been under immense pressure this year, and it doesn’t look like it’s going to improve any time soon.

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BCE (TSX:BCE) has experienced a significant decline in its stock price over the past year due to various financial and operational challenges. Shares of the telecom giant have fallen by 27% in the last year. And though it might now offer a 9.3% dividend yield as of writing, I would still steer clear.

Why? Let’s get into it.

Competition challenges

BCE is facing increased competition and regulatory challenges, which have affected its pricing power and revenue. Falling internet prices due to rising competition have also hurt its revenue streams.

This was made even worse this year. The Canadian Radio-television and Telecommunications Commission (CRTC) has mandated that BCE and other major telecom providers grant smaller internet service providers (ISPs) access to their fibre networks. This decision aims to foster competition and ensure smaller ISPs can offer high-speed internet services to customers using the larger companies’ infrastructure.

BCE has expressed concerns over this ruling, particularly regarding the potential impact on its revenue and the competitive advantage it holds in the fibre internet market. The company has requested conditions such as caps on eligible speeds to mitigate the effects of this mandate.

Impacting growth

The requirement to provide access to its fibre networks to competitors has placed BCE in a more challenging competitive environment. This regulatory decision could potentially lead to revenue losses as competitors leverage BCE’s infrastructure to offer similar services at competitive prices.

Despite these challenges, BCE continues to focus on premium services, customer experience improvements, and strategic pricing to maintain its market position and counteract the effects of regulatory pressures.

Even so, the company’s revenue growth has been modest, and its net earnings have been under pressure due to inflation and competition. For instance, in its most recent quarter, revenue increased by 4.6%, but net earnings fell by 10.9%.

What now?

BCE’s high debt-to-equity ratio makes it vulnerable to rising interest rates, which increase borrowing costs and pressure profitability. This has been a significant factor in the stock’s underperformance. Analysts are also worried about BCE’s ability to sustain its high dividend payout ratio of 114%, particularly as free cash flow growth is under pressure.

To bring investors back then, streamlining operations and reducing capital expenditures are crucial steps. BCE has announced plans to cut capital spending by over $1 billion in the next two years. Reducing debt through asset sales and cost-cutting measures can help alleviate financial pressure. BCE plans to sell non-core assets and has announced job cuts to save operational costs.

Furthermore, expanding broadband and 5G networks, focusing on digital media and tech services, and leveraging strategic tools for digital advertising can drive revenue growth. And if necessary, there is always the option to cut its dividend.

Bottom line

Analysts are cautious about BCE’s future performance, citing the combined impact of high debt, competitive pressures, and challenges in maintaining dividend payouts. Some remain optimistic about the stock’s long-term value but acknowledge the need for careful monitoring of these issues.

Overall, BCE’s path to improvement involves a combination of strategic debt management, focused growth initiatives in high-potential areas, cost efficiency, and prudent dividend management. These steps, along with navigating regulatory and competitive landscapes, are crucial for enhancing the company’s financial performance and stock valuation.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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