The TSX Composite Index made a comeback in the second half of September and reached a new high. While energy and real estate stocks jumped, telecom stocks remained subdued. The sector has been in headwinds. The regulator is asking two telcos, which poured billions into building a fibre network, to share that network with competitors at discounted rates. That’s something the telcos strongly oppose. This regulatory overhang is keeping the telco stocks from recovering. Among them is a magnificent dividend stock, BCE (TSX:BCE).
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This magnificent dividend stock trades at a once-in-a-decade valuation
BCE stock has dipped 36% in over two years as competition increased. After the Rogers and Shaw Communications merger, BCE and Telus entered competitive pricing and promotional activity to grab a market share. Both new connections and churn rate increased, reducing BCE’s average revenue per user (ARPU) by 1.9% year over year to $58.04 in June 2024.
BCE saw a 269% jump in prepaid net additions as it targeted new Canadian customers. The company is bringing in new customers at base prices and will look to convert them into postpaid consumers later.
BCE’s revenue fell 1% due to aggressive pricing and the closure of The Source stores. Its product revenue fell 8.7%, as BCE is exiting the low-margin, highly regulated business and entering high-margin, faster-growing businesses of digital marketing, cloud and cyber security services.
The transition to profitable, margin-accretive subscriber growth reduced revenue but increased adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) by 2% in the second quarter. 2024 is a year of restructuring, and the earnings per share (EPS) are expected to fall by 2-7% due to an increase in interest expense, depreciation, and amortization.
Triggers that could drive growth in these dividend stocks
BCE is focused on selling non-core assets and using the proceeds to reduce debt. It recently signed a deal to sell its 37.5% stake in Maple Leaf Sports & Entertainment (MLSE) to Rogers for $4.7 billion. A $1 billion cash inflow is expected from the sale of Northwestel to Sixty North Unity. This could help BCE significantly reduce its $39.5 billion debt.
Moreover, a reduction in interest rate will help BCE improve its net profit by $26 million (for every 1% decrease in interest rate). Add to this the $150-$200 million cost savings from job cuts and a further $20 million from the artificial intelligence (AI) adoption at its call centre.
All eyes will be on BCE’s 2025 guidance and dividend. If the telco shows improvement in net profits and free cash flow and shows some material debt reduction, the stock could soar. Moreover, the pending decision by the regulator on forcing BCE to give competitors access to its fibre network could move the stock price in either direction.
Risks of dividend cuts
BCE has strong 5G growth potential, but its short-term financial woes increase the risk of a dividend cut. It is the second year of BCE operating on a dividend payout ratio of over 100%. Such a ratio is not sustainable. While the telco is refraining from breaking its 16-year record of dividend growth, financial difficulties could force it to pause dividend growth or cut it.
It slashed dividends last in 2008 when it halved the dividend per share to $0.73. However, the company grew its dividend by 116% next year to $1.58, compensating for the cut.
My take on BCE
BCE has several challenges in the short term, but it is now on the path to recovery. Next year could see the fruits of restructuring, rate cuts, end of margin-draining competitive pricing, and focus on high-margin service offerings. Even if there is a dividend cut, investors could hold on to the stock as it will revive and compensate for the weak years.
