BCE’s downfall is Bay Street’s collective failure, from the blue-chip board to institutional investors

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Just six months ago, Mirko Bibic was adamant: BCE Inc. BCE-T would not cut its dividend.

At the time, the Canadian cable and wireless giant had just announced a $5-billion acquisition to expand into the United States, and Mr. Bibic, the chief executive, was grilled about the price tag. BCE’s balance sheet was already loaded with debt, and the company’s cash flow did not cover its quarterly payout to shareholders.

Never mind the noise, Mr. Bibic seemed to say. Expanding into the U.S. would deliver more cash flow. The payout could be managed so long as the dividend stopped growing, and BCE had been raising it since 2009.

The argument backfired. Over the next half-year, BCE’s shares fell another 34 per cent, and by Thursday morning, they traded at roughly the same price as they did in December, 1999.

To save face, the CEO capitulated. On Thursday, BCE announced it would cut its dividend by 56 per cent, saving $2.1-billion annually, and the company is bringing in a partner, PSP Investments, to help fund expenses in its new American division.

Investors seem to approve, with the stock jumping 7.8 per cent since. But now that BCE has bought some time, there needs to be an autopsy, because it never should have come to this. The company‘s downfall can’t be pinned on higher interest rates or management alone. What’s played out is a collective failure on Bay Street, from BCE’s blue-chip board, to analysts, to institutional investors.

Rita Trichur: BCE’s dividend cut was inevitable. But its growth plans are confounding

It is true that the initial pressure on BCE’s shares came from higher interest rates. As rates rose in 2022 and 2023, dividend-loving investors recalibrated because securities such as ultrasafe guaranteed investment certificates started paying similar yields.

But over the past two years, there has also been endless denial – particularly since September, 2023, when Vince Valentini, an analyst at TD Securities, noticed something odd in BCE‘s financial statements. Ultimately, he realized the company spends hundreds of millions of dollars each year on leases for things such as satellites – it is the largest provider of satellite video subscriptions in Canada – but did not include their full cost when calculating free cash flow.

Once he included these leases, Mr. Valentini found BCE had $550-million less in cash flow each year, which mattered because it sent BCE’s dividend payout ratio – a measure of dividend payments to cash flow– soaring to 148 per cent. That meant the payout was unsustainable – yet BCE’s consistent dividend growth had been a major reason why its shares traded at a premium valuation.

In a note to clients, Mr. Valentini apologized for what he called a “historic oversight.”

From there, things kept getting worse for BCE. Every year the telcos run sales around back-to-school and Black Friday, yet in the fall of 2023, the competition was unusually fierce. Quebecor Inc. had just acquired Freedom Mobile and was given access to Rogers Communications Inc.’s national cell service network, so it got aggressive with pricing to win customers. Instead of following the norms, Quebecor kept its promotions going into 2024, and has continued them to this day, limiting incumbents such as BCE from charging premium prices.

While this played out, cable television customers kept cord cutting, and the federal government did an about-face on immigration. The latter was a major blow, because most Canadians already have a cellphone, so sales to newcomers matter.

To its credit, BCE has not sat around idly. In February, 2024, the company announced plans to slash 9 per cent of its work force, and that September, Mr. Bibic sold BCE’s 37.5-per-cent stake in Maple Leaf Sports & Entertainment to Rogers for $4.7-billion.

However, the past six months have been particularly confounding. After BCE sold its MLSE stake, everyone and their mother expected the proceeds to go toward debt repayment. Mr. Bibic has invested heavily in upgrading the company’s cable and internet infrastructure to high-speed fibre, and this initiative has sent BCE’s long-term debt soaring to $34-billion.

Yet, in November, Mr. Bibic announced the $5-billion deal to buy Ziply Fiber, which serves customers in the U.S. Northwest, and only paused BCE’s dividend growth. While the expansion strategy has merit, timing matters. Just two months before the deal was announced, BCE’s debt was downgraded by ratings agencies Moody’s Investors Service and S&P Global Ratings.

How BCE’s board approved the takeover while the balance sheet is so stretched remains a mystery. Unlike rival telco giants where the CEO or executive chair has outsized influence, BCE was thought to have good governance from a reputable board, one chaired by former Royal Bank of Canada CEO Gord Nixon. (Mr. Nixon and BCE declined to comment.)

As for institutional investors, they, too, overlooked the extent of BCE’s dividend woes, and have barely made a peep despite all that’s transpired over the past six months. Although some investors have clearly sold shares, BCE held its annual general meeting this week, and every single director got the approval of at least 95.9 per cent of shareholder votes cast.

So, yes, BCE’s executives deserve blame for how it came to this. But given how much was overlooked, there is lots of it to go around on Bay Street.