BCE just cut its dividend by more than 50%. Here’s what that means for the company’s finances going forward — and what Motley Fool Canada Chief Investing Officer Iain Butler thinks about the future of the stock. Is BCE a buy now?
Prefer to read? There’s a transcript below.
Transcript
Nick Sciple: I’m Motley Fool Canada senior analyst Nick Sciple, and this is “The Five-Minute Major,” here to make you a smarter investor in about five minutes. Today, we’re discussing BCE‘s (TSX: BCE) big dividend cut announcement. And my guest today to help me do that is Motley Fool Canada Chief Investment Officer, Iain Butler. Iain, thanks for being here.
Iain Butler: Great to be here, Nick. Excited to talk BCE again.
Nick Sciple: BCE released its first-quarter results on Thursday, May 8, and as part of the release, the company announced plans to cut its dividend payout by more than half. The dividend has been in question for some time at BCE. Iain, why was now the right time for the company to cut?
Iain: Well, now may not have actually been the right time. The right time might have been a few years ago, but the simple fact was, the dividend was not affordable. Taking a step back, I want to highlight that the stock market is pretty darn smart. Prior to this, BCE was yielding 13.6%. And that’s the market telling us plain as day that the dividend would be cut or needs to be cut. It just had to be cut. So not only that, the market was even telling us that the dividend was likely be cut in half, so the yield would resemble peers in the Canadian telecom space. So of the Big 3, Telus (TSX: T) currently yields 7.75%, and Rogers (TSX: RCI.B) yields 5.7%. So with this cut to its quarterly payout to $1.75 annually, BCE now yields 5.7%.
The market’s tough to trick, and it certainly got this one right. It adjusted the share price accordingly, and we’re left with a company that now has a share count of about 920 million outstanding, and this payout has gone from — with this new payout of $1.75 — the annual obligation has gone from $3.3 billion to $1.6 billion.
BCE’s free cash flow over the past 12 months was $3.8 billion. So with a $1.6 billion new dividend obligation, management has certainly given itself some breathing room and financial flexibility, and I would say that the new level certainly appears sustainable, at least.
Nick Sciple: You mentioned that maybe the market was sniffing this out. If you look at the response of the stock, investors are maybe letting out a bit of a sigh of relief from this news, [and are] not surprised to see the dividend cut. BCE stock was up as much as 5% in the market day following the earnings release. Do you think the worst could be behind BCE today?
Iain Butler: Maybe? I mean from a financial standpoint. Again, they’ve certainly given themselves flexibility. It was tight. And this is a company that’s taken on a huge amount of debt. And a lot of that debt is actually because of the dividend obligation that they had. They just were not generating enough free cash flow to cover the dividend, and they had to go borrow money to pay shareholders, which is not a great way to allocate capital in the grand scheme of things. What should happen when a company takes on debt
is that they take that capital, invest it in the business — into projects that provide a return greater than the cost of that debt. That’s the lifeblood of any business out there, and to a certain extent, BCE has not been doing this. So now we’re left with a company with a huge debt load. Still $39 billion in debt, as of today’s report. And they’ve got now an extra $1.6 billion, call it annually, in free cash flow to chip away at that debt.
Iain Butler: But, so what?
I mean, what’s lacking here? They’ve sort of done some things on the cable front. We could delve into that with another Five-Minute Major, but from my perspective, what’s lacking is a reasonable growth story. They’ve got this stodgy old telecom business that generates cash flow. But again, they’ve just taken on this huge financial obligation on the debt side. So you’re going to get a 5.7% yield if you buy the stock today. That’s probably money good, and maybe there’s limited downside to the stock. But I just don’t see a lot of upside. Frankly, it’s hard to justify multiple expansion from here, and it’s hard to really get excited about any kind of growth story when it comes to BCE.
So as you can tell, I’m not overly enthused about the situation. Great that they freed up some capital. But what are they going to do with it? And that’s a huge question. So I’m not all that interested [in BCE], and I would say of the big 3 Canadian telecoms, to me, Telus really stands out. I think I mentioned the 7.75% dividend yield that Telus offers. I think that is money good. The market is indicating some skepticism over that, but it certainly doesn’t tell you that it’s going to be cut,
and they’ve certainly got the cash flow to support that dividend. Telus has some growth engines — again, maybe a topic for another Five-Minute Major — that the other two, Rogers and BCE just don’t have. So to me, Telus is the one that stands out in this group.
Nick: So BCE, answering some questions about the sustainability of its dividend, but still a business that is challenged relative to some of the other big telecom players for those looking for high dividend payout. Maybe Telus is a better stock to be looking at today. Iain, thanks so much for joining me for this edition of the Five-Minute Major. Hope to see you next time.
