Despite Canada’s sluggish economy, the S&P/TSX 60 Index delivered a surprisingly strong performance in 2024, returning 20.9% when including dividends. But representing a group of 60 of Canada’s largest companies, it’s only natural that not all of them rose to the occasion.
Today, we’re looking at two blue-chip Canadian stocks from this benchmark that fell short of expectations last year – and offering my outlook for them in 2025.
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A beaten-down oligopoly
Even with dividends reinvested, Canadian National Railway (TSX:CNR) ended 2024 down 10.5%.
This lacklustre performance was largely attributable to macroeconomic headwinds – specifically, threats from the incoming Trump administration to impose 25% tariffs on Canadian goods.
While CNR’s network is primarily Canadian, these tariffs would create significant ripple effects. Canadian exports account for a sizable portion of rail freight, and punitive trade measures could sharply reduce demand for transportation services.
Add to this the fact that CNR is economically sensitive and cyclical, and you get a stock struggling to find its footing amid market uncertainty. That said, this is likely short-term pain.
With its position as a duopoly, a 31.7% profit margin and a 27.6% return on equity, CNR remains one of Canada’s most efficient and dominant companies. At a 5.7% earnings yield (the inverse of its price-to-earnings ratio), I think the stock offers long-term investors a solid deal right now.
A flaming dumpster fire
Back on November 21, 2024, I advised readers to steer clear of Canadian telecom giant BCE (TSX:BCE).
At the time, the stock closed at $37.27. As of January 16, while I’m writing this, BCE trades at $32.89. If you listened to me and avoided BCE, you sidestepped an 11.8% loss.
BCE finished 2024 down a brutal 29.9% – and yes, that includes reinvesting its hefty dividend. Speaking of which, the dividend is now yielding an eye-popping 12.3%, but not for the right reasons.
BCE isn’t raising payouts; instead, its stock price has plummeted, artificially inflating the yield. Dividend cuts are looming, with the company halting increases and facing serious financial strain.
Today, BCE remains a firm “no thank you” from me. The issues I outlined in November are still very much alive:
- Debt addiction: As of the most recent quarter, BCE reported $2.6 billion in cash against a staggering $40.1 billion in debt. Its 222.9% debt-to-equity ratio is absurdly high, even for a quasi-utility like telecom.
- Adding to the mess: BCE is acquiring 100% equity in Ziply Fiber, using $4.2 billion in net proceeds from selling its stake in Maple Leaf Sports & Entertainment (MLSE). However, the deal also assumes an additional $2 billion in net debt. I’m doubtful this acquisition will be accretive to earnings.
- Dividends on shaky ground: BCE has halted dividend increases, maintaining its $3.99 per share payout for now. But with leverage ratios stretched and free cash flow under pressure, that dividend isn’t sustainable.
- Downgraded credit: S&P Global recently downgraded BCE bonds from BBB+ to BBB, citing expectations that debt leverage will remain elevated in the 3.5–3.7 range through 2026 due to rising competition and ongoing capital investments.
- Vague promises: BCE’s management plans to reduce leverage by 2026 through asset sales and other initiatives, but the timeline and execution remain highly uncertain.
Bottom line: Don’t chase yield on this one. BCE is a ticking time bomb, and as a former unhappy customer, I’ll admit it would bring me no small pleasure to see them file for Chapter 11. They can kick rocks.
