BCE (TSX: BCE) is undergoing a transition from telco to techno. Does this transition mean shifting from dividend to growth? Most technology companies focus on growth and scalability. But things are different with BCE’s artificial intelligence (AI). BCE is building the AI fabric as a layer on its vast fibre infrastructure. And unlike Google or Microsoft, this AI infrastructure is sovereign. So, what does this mean?
The Bell AI fabric will house data centre, software, cloud capabilities, advanced professional integration services, and an ecosystem of Canadian technology partners. It is reporting revenue from these services in wireline data, the only subsegment of the Communications Technology Services (CTS) segment that is seeing positive growth. Otherwise, all other CTS segments are seeing declines due to slow population growth, falling average revenue per user (ARPU), and rising churn rates.
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What does BCE’s transition mean to its dividends?
The initial years of transition will see significant capital expenditure, a lot of partnerships, and setting up an ecosystem, which can generate cash flows equivalent to its wireless revenue. Wireless revenue could keep falling while wireline data revenue could keep increasing. The pace at which the fall and rise happen is something investors should keep a watch on.
To fund the transition, BCE’s management has made some tough decisions, such as slashing dividends and reducing its long-term dividend payout ratio to 40-55% from the earlier 65-75%. Since the business is restructuring and new cash flows will take time to materialize, BCE has paused dividend growth. Moreover, the balance sheet debt has become one of the management’s priorities. It plans to reduce net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) to 3.0x by 2028 from 3.8x at present. Debt reduction is important as 7.6% of its revenue is spent on paying interest expense.
Dividends are paid from the surplus cash left after deducting capital expenditure. Since the transition is seeing churn in the telco business and also uptake of AI services, the telco business is largely funding dividends. As for AI, BCE’s share price is moving alongside AI news.
Unless BCE lowers its leverage ratio to 3.0x, dividend growth is highly unlikely. To reduce debt, the company is offloading non-core assets. However, its three-year plans and targets are changing frequently because of the telecom industry dynamics. If BCE manages to get a sizeable revenue from AI services, it could become the core of BCE’s new cash flow model.
Nvidia touts GPU as an alternative asset class
It is not just BCE; Nvidia’s (NASDAQ: NVDA) chief executive officer, Jensen Huang, in a CNBC interview, touted the idea of bringing data centre computing as an income-generating asset class. He said, “Fundamentally, what’s different about this industry and this way of doing computing is that the computer is now part of the infrastructure, like electricity, like the internet, and so you have to think about it like it’s infrastructure.”
If the future of graphics processing computing (GPU) is infrastructure, it could make data centers the new must-have subscription. Just as 4G made video calling possible on mobile data, 5G and AI fabric could make AI at the edge possible. Self-driving cars, AI security cameras, and all possible integrated solutions could lead the way to more devices connected to the fabric.
More connected devices could mean higher revenue. In the long term, AI infrastructure could become the next dividend growth driver. Now it is difficult to say when it will happen, and whether this model will succeed, but it is an asset class worth considering for the long term.
What’s going on with BCE’s dividend?
If you are considering buying BCE for its dividends, it can give a 5.37% yield. Whether BCE can sustain its dividend is something that time will tell. If the free cash flow falls significantly, a dividend cut is possible. Although the free cash flow looks healthy for now, it should be watched closely till BCE’s transition is complete.
While you can buy BCE stock for its dividend yield, do not use it as a source of retirement income. Instead, use it to diversify your income stocks. For retirement income, you could consider a more reliable and safe stock like Enbridge.
