BCE Inc.’s BCE-T plan to slash its dividend by 56 per cent was unavoidable, but its convoluted growth plans risk adding to its shareholders’ chagrin.
Investors knew the cut was coming. Indeed, the writing was on the wall long before last fall when the Montreal-based telecommunications company halted its annual dividend growth for the first time in 16 years.
The dividend simply wasn’t sustainable. The payout has been costing BCE more than it has been earning in free cash flow for some time now, while its sagging share price was pushing its annual dividend yield above 13 per cent.
BCE finally bit the bullet on Thursday, announcing that it would cut its annualized dividend to $1.75 from $3.99. The diminished dividend, which amounts to 43.75 cents per quarter, takes effect with the company’s second-quarter payout on July 15.
The telecom also appropriately lowered its target payout ratio to 40 per cent to 55 per cent of free cash flow, from 65 per cent to 75 per cent, and duly eliminated the 2-per-cent discount on its dividend reinvestment plan.
A dividend cut is always a bitter pill to swallow for shareholders, but so is the company’s more than $33.8-billion in long-term debt. There is widespread agreement that BCE was right to refocus on lightening that load.
As a result, BCE’s stock staged a relief rally on Thursday, rising more than 5 per cent, or $1.58, to close at $30.96 on the Toronto Stock Exchange.
It remains to be seen, however, if BCE’s growth plans, especially in the United States, result in meaningful gains or recurring indigestion for investors.
BCE, which has previously announced its intention to pay $5-billion to acquire U.S.-based Ziply Fiber, has struck a new strategic partnership with PSP Investments, called Network FiberCo., in connection with that pending deal.
The details are difficult to follow and leave investors with the impression that BCE is both a buyer and a seller.
It seems BCE will wholly own Ziply‘s existing operations after the deal closes but will only own 49 per cent of Network FiberCo., which will function as a new wholesale network provider.
PSP Investments, which will control Network FiberCo. with its 51-per-cent stake, could potentially invest more than US$1.5-billion to expand Ziply’s fibre network. BCE will also contribute its share of equity capital.
Network FiberCo. will also issue its own debt to fund a portion of the build costs and that debt will be non-recourse to BCE, PSP and Ziply.
Confused yet?
The complexity is reminiscent of a deal Rogers Communications Inc. struck last year to reduce its debt load in the wake of its acquisition of Shaw Communications Inc. and its decision buy BCE‘s stake in Maple Leaf Sports & Entertainment.
Rogers, which finally disclosed the details of that agreement last month, sold a minority stake in its wireless infrastructure for $7-billion to a consortium led by New York-based Blackstone Inc.
Such clever manoeuvres may beautify balance sheets, but they raise questions about whether telecoms truly have the financial wherewithal to run their own businesses and invest for future growth.
For its part, BCE is treating Network FiberCo. as an equity investment. Its financial statements will not be affected by any of debt and capital expenditures incurred by Network FiberCo.
That’s important because Moody’s downgraded BCE’s credit rating to one notch above junk bond status last August. Although Moody’s said Thursday that BCE’s dividend cut and new strategic partnership with PSP are “credit positive,” it left the telecom’s credit rating unchanged.
Network FiberCo. is being created to take on the debt needed to fund expansion and to keep it off BCE’s balance sheet. That, in turn, allows BCE to position itself as a growth company even though it is not in control of the new entity.
Is the Ziply deal worth all this financial engineering if BCE has to share the profits with PSP?
BCE, which is planning to sell more non-core assets to pay down debt, has also said that it is transforming itself from a “telco to a techco.” Its goal is to become a $1-billion tech services organization by 2030.
But BCE’s dividend woes, coupled with its need for a strategic partnership to properly fund Ziply’s future expansion, suggest its shareholders would be better served if the telecom became a utility company instead.