Opinions
Robert Floyd
BCE Inc.
BCE-T
COMMENT
Jan 15, 2009
Stock price when the opinion was issued
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When he chose this last year, he was looking for a bounce. Which did happen, but then everything came unglued. Regulators, competition, and payout ratio is too high. In a downward channel on book value. Earnings are also in a downward channel. FMV has lots of upside potential, but that's the only bright spot. Be cautious here.
Recently added a bit to his position. BUT: do not buy it for the current dividend yield. Management maintaining dividend for 2025, but Lorne strongly believes it will be cut in 2026 and he wants that cut. Generates lots of FCF, but lots has been going to the dividend. He'd much rather the FCF be used to pay down debt and invest in its business.
In his early days, someone said to him that when you see a high dividend like this one, "The dividend is talking to you." If the dividend were cut, the stock might actually pop a bit, as it would demonstrate management's focus on reinvigorating the business.
The worst is likely over here, and we think a dividend cut would actually be well-received by investors at this point. We would regard it as a HOLD but could be accumulated (slowly) into any new weakness that develops.
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Telco sector sees steady demand keeping it defensive, but not a growth rocket. Facing stiff competition, regulatory issues, underperforming the sector index. Cost-cutting and asset sales. Cheap. Juicy yield of 8.5%. If you're in it for the yield, and you can stomach the volatility, cost cuts could pay off in the long run.
The most-hated stock in the past year. Everyone expects them to cut their dividend, which is under review now. The worst is probably over. It remains a regulated utility with good cash flow, which is what investors want in this market now. So, BCE can do well by default. It doesn't take much good news or rate cuts to lift this stock.
Yield is about 12.2% right now, with talk of a cut; she thinks chance of that is greater than 50%. Institutional investors want the cut, retail investors don't. If cut, stock price would probably go up. If you have a very long time horizon, thinks you can do well. Likes its critical infrastructure.
Was doing a bit better this year, but then came off again. Stock may have reached a bottom. A bit further behind Telus in the buildout of fibre to the home. Telus announced potential sale of towers; if BCE were to do that, dividend wouldn't necessarily need to be cut.
He actually likes both. Looking at price action over the last few days, these names have held up rather well. Sector's bottomed out. Both names have high dividend yields, tremendous FCF, lots of opportunity going forward to buy back stock. Worst is over for the sector, phenomenal opportunity.
With BCE, you should anticipate a dividend cut; this would be fine with him, as it will free up $$ to reduce debt and possibly buy back stock. If that happens, it would be a positive rather than causing the bottom to fall out of the stock. Investment community wants it to cut the dividend, reduce debt, and undertake a better allocation strategy. Still throwing off significant cashflow. Too early to say if it overpaid for the Ziply acquisition.
Telus has done better, with better growth. Invested in other things to diversify its business.
Dirt cheap. Multiple is ~10-10.5x PE. Market's lost confidence. FCF generated is roughly in line with the dividend, but looks undercovered relative to earnings. If dividend were to get cut, would be a positive catalyst. US acquisition will suck cashflow.
People own it for the dividend, not for growth. Cash cow. If management retrenches, there's a path to getting a better multiple. Very little downside. Buy here if you want income.