Shares of BCE (TSX: BCE) have started to retreat, now down 13% from those late-May highs. Undoubtedly, it’s getting harder to go bottom-fishing for high-yield names within the telecom scene, even following cost-cutting efforts and a pivot to get into the lucrative business of AI infrastructure.
As enticing as it is to get into the field of AI data centres and all the sort, there’s a hefty capital expenditure (CapEx) bill to fund earlier on before the cash flows start coming in. And while expanding into AI infrastructure seems like a “way out” for many firms under pressure across a wide range of industries (how many cryptocurrency miners are moving into AI data centres?), I do think that investors should play things cautiously, especially in a market that seems to be punishing higher spending on AI-related efforts rather than rewarding it.
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The AI infrastructure business could prove lucrative
With BCE’s Bell joining forces with Canadian AI lab Cohere, things could get that much more interesting as the telecom titan looks to help Canada get its AI infrastructure to where it needs to be.
While I do think that AI compute could be a massive cash cow a few years down the road, especially as AI continues to experience off-the-charts growth while demand continues to overwhelm supply, I would brace for a bit of near-term pain and uncertainty before that big payoff can finally be reached.
Indeed, it costs quite a bit to get into the space, but if there’s a firm that can do it, it’s BCE. The company slashed its dividend previously and has been engaging in layoffs, as well as other cost-saving efforts. Whether it’s enough to make a big enough splash in Canadian AI, though, remains the big question. Either way, the dividend looks more than safe. Though how it can grow as BCE spends to expand its AI infrastructure presence remains uncertain. In short, expect a safe payout and modest growth over the long run.
Spending money to make money
For now, investors seem to be a tad more cautious, especially since many seem to be a bit allergic to CapEx these days, especially tied to something as uncertain as AI infrastructure. While the business of cell towers and all the sort was seen as stabler, I’m not so sure how wide the moat will be in a decade from now when satellite connectivity becomes better and more commonplace.
Indeed, things seem to be getting a bit more uncertain for the Canadian telecoms, and while I understand why investors would want to sell now despite ongoing efforts to enhance future cash flows, I do think that the valuation is getting way too low. While plenty of challenges might lie ahead, I certainly would not dare to venture a bet against the name, even as the negative momentum picks up again and shares fall below $30 per share again.
One of the chepest near-6% yields around?
The stock goes for 4.4 times trailing price-to-earnings (P/E) with a 5.8% dividend yield. Not at all bad for a former market darling. Of course, the telecom industry continues to be tough, and with AI data centres thrown into the mix, it’s hard to tell what will remain after CapEx is spent, operating costs are cut, and new cash flows come online.
