BCE (TSX:BCE) is one of Canada’s telecommunications (telco) giants. Along with Rogers and Telus, it is part of a nationwide telco oligopoly. This fact has led to considerable groaning from Canadians, as the lack of competition in the telco space results in our nation having some of the highest phone and cable bills in the world. On the flip side, Canada’s well-protected telco companies pay investors large and consistent dividends.
Despite their high dividend payments, Canada’s telco stocks have been struggling in recent years. BCE stock peaked in 2022 and has been in a free fall ever since then. If you paid attention to the last sentence, you might have a clue as to the reason why. In 2022, the Bank of Canada commenced its fastest interest rate hiking spree since the 1980s. It continued until mid-2023.
Telcos, in general, have high amounts of debt, so their performance tends to suffer when interest rates go up. Not surprisingly, all of the big Canadian telcos’ earnings declined in 2022 and 2023. This year, the Bank of Canada made its first rate cut since 2021. That should theoretically have improved BCE’s business, but it did not stem the stock price bleeding, as BCE stock is down 19.6% year to date.
Negative earnings growth
One big problem for BCE stock is the fact that its earnings growth has been negative for several years now. In its most recent quarter, BCE delivered the following:
- $6 billion in revenue, down 0.7%
- $457 million in net income, down 42%
- $1.1 billion in cash from operations, down 9.2%
- $85 million in free cash flow, unchanged
It was a rather disappointing performance. Of course, it could have been just one bad quarter in an overall good track record of positive growth and high profit margins.
Was it?
No. BCE’s long-term track record is bad, too. Here are the five-year compounded growth rates in revenue, earnings per share (EPS) and free cash flow:
- Revenue: 0.89%
- Earnings per share: -9.6%
- Free cash flow: 1.2%
The long-term negative earnings growth is ugly. The growth in free cash flow has at least been positive but below the inflation rate. Overall, BCE appears to be having a bad time in this new high interest rate environment.
High payout ratio
Another issue with BCE is its high payout ratio. The company pays out 94% of its earnings and 106% of its cash flows as dividends. This implies that the company is paying out most of, or possibly more than, its profit in the form of dividends.
BCE stock: Foolish takeaway
BCE stock has a 9.2% yield at today’s prices. That’s certainly tempting, but the company paying those dividends is performing poorly. With its earnings down over a full five-year period, BCE’s long-term trend is a bad one. Also, BCE pays out basically everything it earns in dividends. This could indicate dividend sustainability issues. BCE’s yield is enticing, but there are too many negatives offsetting it. I personally prefer Rogers stock because it’s cheaper and has a more modest payout ratio than BCE.
