BCE’s cut of its annual dividend to $1.75 from $3.99 marks the end of its extended history of steady payout growth.Christopher Katsarov/The Canadian Press
BCE Inc. BCE-T slashed its dividend by more than half and struck a partnership for its U.S. expansion, in a bid to shore up its finances after a tumultuous period for Canada’s biggest telecom company.
BCE’s move to cut its annual dividend to $1.75 from $3.99 marks the end of its extended history of steady payout growth.
The cut had been anticipated by investors for months. BCE has been distributing to shareholders more in dividends than it has been earning in free cash flow, while also balancing the weight of more than $30-billion in long-term debt.
“What we’ve heard from discussing this with shareholders and investors, the message is to focus in the near term on lowering debt,” said BCE president and chief executive officer Mirko Bibic in an interview Thursday morning.
“We wanted to give ourselves the flexibility to invest for growth, because our job in the short, medium and long term is to grow this franchise with the view of driving total shareholder returns,” he added.
But the sharp dividend cut to one of Canada’s historic blue-chip stocks is a tough pill to swallow for investors, along with BCE’s top management, including Mr. Bibic, who has presided over a share-price decline of 50 per cent since taking on the top job in 2020.
Over that time, the company has dealt with pandemic inflation, spent heavily amid a slowing market, and accrued an additional $10-billion in long-term debt.
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The entire telecom industry has been affected by lower immigration and mounting competition. But according to Veritas Investment Research analyst Liam Gallagher, “BCE management really got themselves into this problem.”
He said the company was right to build its fiber-optic network aggressively, but it didn’t maintain financial flexibility in its balance sheets while doing so, and continued to raise its dividend even after the market started to price in a cut.
Moreover, he said, the company could have better “read the room” based on where its debt leverage was when considering its proposed acquisition of U.S. company Ziply Fiber for $5-billion, a deal that sent BCE’s stock tumbling 10 per cent in a day last year.
“I think they hoped they could grow themselves out of the dividend issues. But it was just too big of a hole,” Mr. Gallagher said.
BCE’s share price rose 5 per cent Thursday. Until the dividend cut, the widely held shares were yielding 13.6 per cent, which was broadly seen as unsustainable for the company. This will now fall to under 6 per cent at current stock levels.
Meanwhile, the telecom industry’s challenges persist. In a call with investors, Mr. Bibic acknowledged competitive and inflationary pressures, heightened macroeconomic uncertainty, a slowdown in immigration and the higher cost of capital, given the decline in BCE’s share price.
University of Ottawa finance professor Fabio Moneta said that while cutting the dividend was “the right call,” it would have been a difficult decision for the company considering the potential to lose investor trust.
“I think the company didn’t have too many other options. Either you increase the cash flow, which is difficult to do in this situation, or you reduce the dividend,” he said.
Some analysts struck a more positive tone. In a note to investors Thursday morning, Scotiabank analyst Maher Yaghi said management “should be able to regain investor confidence in the long term” now that it has indicated a clear line of sight toward deleveraging in the years to come.
And Mr. Bibic noted that the company aims to reward investors once it has paid down debt. Once it reaches its leverage goal of 3.5 net debt to EBITDA ratio by 2027, BCE would then have the flexibility to consider “other ways to return capital to shareholders,” he said.
To further this goal, Mr. Bibic said Thursday that the company has launched two additional formal processes for divestitures. BCE’s executives said last quarter that they were assessing potential non-core assets to sell to pay down debt, including its telecom infrastructure.
And the company has already moved to reduce balance-sheet pressure with another deal. BCE said Thursday that it struck a partnership on Ziply with PSP Investments that will see the Ottawa-based pension plan invest US$1.5-billion to expand the fiber network from 1.3 million to up to eight million potential customers.
The deal will relieve BCE of much of the capital-expenditure burden of building out the Ziply network and improve the company’s free cash flow forecast by $1-billion between 2026 and 2028, Mr. Bibic said.
PSP Investments, a public-sector pension fund with $265-billion in assets, will own a 51-per-cent equity stake in the new Network FiberCo business, to build fiber infrastructure outside of Ziply’s incumbent footprint.
BCE will continue to own 100 per cent of the existing Ziply business.
“We see this transaction as essentially reducing BCE’s exposure to the Ziply venture. Canadian telecom investors have been lukewarm to news of changes in infrastructure ownership structures recently, but derisking the project could be well-received,” said Desjardins analyst Jérome Dubreuil.
PSP Investments first invested in Ziply in 2019, alongside four other institutional investors, then agreed to sell the company to BCE in November, 2024.
In a memo Thursday, credit agency Moody’s Ratings said BCE’s ratings and outlook are unaffected by the announced dividend cut and PSP Investments partnership.
In its first quarter, BCE had net losses of 596 mobile customers compared to analyst consensus of 7,700 additions. This included losing nearly 10,000 net postpaid subscribers, in part the result of a slowing market because of reduced immigration and some consumers switching to prepaid plans.
Internet net additions of 9,500 missed consensus estimates of 23,600.
Revenue was $5.9-billion, down 1 per cent from last year. Adjusted net earnings of $633-million were down 3 per cent.
Analysts estimated that Quebecor Inc., which reported earnings on the same day, won more than 40 per cent of net new mobile subscribers in the quarter, with its Freedom Mobile brand putting pressure on BCE and its rivals to lower cell-plan prices.
Editor’s note: This article has been updated to clarify that Network FiberCo will be a joint venture between BCE and PSP Investments in which BCE will retain a 49-per-cent equity stake.