BCE Inc. headquarters in Montreal on August 3, 2023.Christinne Muschi/The Canadian Press
Battered shares of BCE Inc. BCE-T have attracted more analyst downgrades this week, and some are calling for a cut to the company’s dividend.
In a note to investors late Thursday, Bank of Nova Scotia analyst Maher Yaghi said BCE should cut its dividend in half and quash its dividend reinvestment plan in order to turn around its financial challenges.
“Let’s call a spade a spade. BCE does not have a FCF problem; it has a payout ratio one,” Mr. Yaghi said, referring to the company’s dividend payments exceeding its free cash flow. “Without tackling this pain point, we believe all other medications will end up treating the symptoms but not truly tackling the root cause.”
He acknowledged that while a cut might initially be “painful,” it would build a stronger foundation long-term.
In November, BCE announced it was acquiring U.S.-based fibre internet provider Ziply Fiber and said that it was putting dividend hikes on hold at an annual payment of $3.99 for all of 2025, and instituting a DRIP to help fortify its balance sheet.
Since then, the company’s shares have dropped by about 25 per cent, and the stock is down around 38 per cent year-to-date. As of Friday, shares were $33.28 on the Toronto Stock Exchange, their lowest point since 2010.
Mr. Yaghi’s calls to cut the dividend mirror a recent Veritas Investment Research survey of two dozen institutional investors. Eighty-three per cent said the company should reduce the dividend and more than half said it should be reduced by at least 50 per cent.
However, not all analysts believe Bell will cut the dividend in the near-term. On Wednesday, Canaccord Genuity Group Inc., lowered its estimate to $33, saying it expected the company to stick to its dividend commitments and the DRIP for 2025.
“At this point, it is not clear whether a dividend cut today would revive the stock, but in a sub-$30 backdrop, that may well be the case,” said Canaccord analyst Aravinda Galappatthige.
“We believe that there is an underlying loss of confidence in the stock that is also playing out,” he added. “Essentially, BCE’s long-held mantle as a highly defensive, low beta stock is no longer valid, we would argue.”
If the stock continues to weaken, the case for the DRIP weakens alongside it, due to equity dilution at low prices, Mr. Galappatthige said. “In that backdrop, the dividend may well have to be revisited.”
In an e-mail, BCE spokesperson Ellen Murphy said that the company intends to pause dividend growth until its payout and net debt ratios are tracking toward target policy ranges, subject to review by the company’s board.
“We recognize the importance of cash generation to many of our investors who want a stable dividend. We have been transparent and consistent that our dividend payout ratio would be elevated for a period of time,” Ms. Murphy said.
Ms. Murphy said Bell’s recent $4.7-billion sale of its stake in Maple Leaf Sports & Entertainment, the Ziply acquisition and its investments in fibre infrastructure were made to support the company’s long-term growth.
On Monday, Morgan Stanley said Bell’s current 11-per-cent dividend yield reflects much of the growth and capital structure concerns in the market. The investment bank also said there were risks in sustaining the dividend levels, given the bank’s calculations of the telecom’s free cash flow and payout ratio.
“Although the DRIP program provides some potential short-term relief, we project it only to be in place until the end of 2025,” said Morgan Stanley analyst Benjamin Swinburne.
In December, Bank of Montreal analyst Drew McReynolds told investors BCE’s stock would likely remain “rangebound” until the company reduced its dividend payout ratios and leverage. However, he said that BCE is well equipped to navigate a slower revenue growth environment leaning on its scale, fibre networks and 5G.
The Royal Bank of Canada, National Bank of Canada, Edward Jones and Barclays Investment Bank have also lowered their target prices for BCE since the Ziply announcement.
Most cited lower wireless and wireline businesses revenue, reflecting greater competitive pressure in both markets. Meanwhile, telecoms have offered discounts on bundled products, which in general has diluting their average revenue per user. And slowing immigration has been seen as a headwind for the industry.
In addition to cutting the dividend, Mr. Yaghi also called on the company to sell assets such as towers or regulated rural networks, merge its media assets with Corus Entertainment in a separate publicly listed company and set up the company’s finances so no extra cash will be needed for future fibre expansions in the U.S.