The artificial intelligence (AI) data centre boom is driving several utility and construction stocks up as demand for electricity increases. These power-hungry buildings need electricity and cooling, which drove several utility and energy stocks upwards. The only upside in AI data centres one can see is from chip companies and electricity utilities as they sign long-term power purchase agreements with hyperscalers.
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Why utility stocks may not sustain data centre upside
However, utility stocks may not be an ideal investment for those looking to gain from data centre upside. Note that utility companies face regulatory delays in getting approvals for capital expenditure and the base rate they can charge for their services. In an inflationary environment, these delays cost the utility more, slimming their margins.
Each utility has to get approval from the provincial regulator. Thus, you will see abrupt growth in utility stocks. The growth vanishes when one set of approvals is followed by another set of delays, offsetting the increased revenue from new rate approvals.
This dividend stock has data centre upside
If not growth from chip stocks, or dividends from utility stocks, where should you look for AI-related dividends?
The telco turning into techno: BCE (TSX:BCE). BCE’s strength lies in building and monetizing nationwide infrastructure. If we look at the history, Bell Canada’s origins date back to the inventor of the telephone, Graham Bell, himself. With over 150 years of operations and countless restructurings, BCE has always been at the top of communication technology.
It is undergoing another restructuring, a complete revamp of its business from telco to techno. This time, the technology upgrade is not just 5G. BCE is building an AI fabric, which comprises data centres, cloud, integration services, and cybersecurity. This sovereign AI infrastructure will help Canada keep its data and AI within the nation.
How the data centre fits into BCE’s dividend model
Now, BCE provides returns largely through dividends. It has been paying dividends for 27 years and grown them in 23 of those years. The last time BCE slashed dividends was in 2000 after the dot-com bubble burst and in 2008 after the Global Financial Crisis. This is because BCE’s infrastructure is capital-intensive and the company relies on debt to fund it.
This time, BCE slashed dividends as regulatory change forced it to open its network to competitors at a wholesale price determined by the regulator. As the return on investment from fibre infrastructure fell, the telco is now moving to the next leg of growth, AI.
Speaking of AI, Nvidia (NASDAQ:NVDA) chief executive officer Jensen Huang talked about computing becoming a utility like natural gas and electricity. He described graphics processing units (GPUs) as an alternate asset class; an asset-backed security (ABS) with GPUs as the underlying asset. The ABS will carry high yield and have a rapid amortization schedule, considering the fast depreciation of GPUs. A GPU-backed debt instrument will make capital investment tradable.
BCE has not considered the ABS approach. However, the concept of making AI infrastructure a utility does show opportunity for BCE to monetize the AI fabric for regular dividends. Selling AI services to enterprises and leasing cloud space are among the AI services offered by BCE.
The telco is building a $1.3 billion AI data centre in Saskatchewan. It expects to generate $500 million in annual revenue and $400 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of 2027. If it can achieve this, the EBITDA can pay off the data centre in three years, leaving the remaining four years to make profits and accumulate capital for another upgrade.
What to expect from this stock?
The initial years will see increasing capital in AI opportunities and declining revenue from the telecom business. The free cash flow being diverted into building the AI fabric could pause dividend growth for the next three years. Moreover, BCE’s focus will be on reducing the debt it took to build 5G infrastructure before the regulator hijacked its pricing power.
Once the AI fabric is fully operational and debt is within acceptable levels of 3 times adjusted EBITDA, dividend growth could return. Until then, it is a stock to hold for its 5.4% annual yield.
