Canada’s telecom sector is undergoing massive changes, from consolidation to technological upgrades to 5G, restructuring, and regulatory changes. And all this while interest rates have risen to decade-high levels, and telcos spent lavishly on 5G networks. Stress from all ends pushed the telecom stock prices to a multi-year low. The latest earnings have shown a stark difference in the performance of the two telcos. Yet telecom stocks are a screaming buy for their high-yield dividends.
The 10.45% dividend yield
Let’s begin with the most controversial stock, BCE (TSX:BCE). Its third-quarter earnings sent a blow to shareholders, materializing their worst fears of a dividend-growth pause and revenue decline. The telco has been restructuring its business aggressively in 2024 and had warned shareholders at the beginning of the year that net loss is coming. And it did come, and that too at $1.12 billion in the third quarter as the telco took a $2.1 billion non-cash impairment cost of its Bell Media’s TV and radio properties. This impairment reflects the reduced demand for advertising and high interest and severance costs.
Note that it is a non-cash cost, so that does not affect Bell’s cash flow. It still reported a free cash flow of $832 million. Meanwhile, analysts were upset that BCE is selling its 37.5% stake in Maple Leaf Sports & Entertainment to Rogers Communications for $4.7 billion. Bell stated that it would use the proceeds to pay the debt, but instead, it is using the proceeds to acquire U.S. Pacific Northwest internet service provider Ziply Fiber for $5 billion cash. BCE will also absorb Ziply’s $2 billion net debt.
With already high debt and an expected net loss, BCE needs all the cash to complete its restructuring and pay down debt. Hence, it has sustained the dividend per share at $3.99. It means you will get your dividends. However, the company won’t grow dividends until it returns the dividend-payout ratio to its target range of 65-75% from 111% in 2023. And it plans to reduce its net debt to adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to 2.0-2.5 from the current 3.7 times.
All these reasons pulled BCE’s stock price down 15% in November, making the $3.99 annual dividend 10.45% of the stock price.
Is BCE stock attractive or cautionary?
BCE delays are not its denials. The company took the right step by pausing dividend growth as the priority has shifted to reducing debt and focusing on high-margin businesses. Until the new business structure is adopted, the financials will fluctuate.
Buying the stock now with the hopes of recovery and better profits in the next three years could make BCE a value buy. Most value investors buy good companies with market share, strong management, and good growth potential in their difficult times. The restructuring will better prepare BCE for the 5G growth. Moreover, expansion to the United States will help the company diversify its client base. When the company realizes these profits, dividends could shoot up. Until then, a 10.45% dividend yield can help you beat the market.
Telus stock
While BCE paused dividend growth, Telus (TSX:T) increased its dividend by 3.4% as it realized cost benefits from restructuring. Even Telus witnessed a slowdown in revenue. However, it is looking to improve margins from its current businesses after ending a price war with BCE. Even Telus is suffering from high debt levels and dividend payout ratios beyond the target range. However, the management is weathering the hit to fulfill its promise of a 7-10% average annual dividend growth between 2023 and 2025.
Buying the two telcos could help you make the most of a recovery in the telecom stocks.
