Scotiabank says BCE must slash dividend

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After a year that sent BCE Inc. shares to a 14-year low, a Bay Street analyst said Canada’s largest telecom company needs to cut its dividend.

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“Without tackling this pain point, we believe all other medications will end up treating the symptoms but not truly tackling the root cause,” Bank of Nova Scotia analyst Maher Yaghi wrote to clients on Thursday evening. “Our wish list is for the company to cut the dividend in half to provide the needed breathing space to de-lever the balance sheet.”

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More importantly, Yaghi said, BCE needs to “abolish” its dividend reinvestment plan, which he argues will dilute shareholders by as much as $1.3 billion each year.

Shares of BCE are down 36 per cent so far this year to $33.42 as of 11:42 a.m. on Dec. 20, falling faster than peers like Rogers Communications Inc., which is down 29 per cent over the same timeframe. Both telecom companies are also underperforming the broader S&P/TSX composite index, which has gained 16 per cent for the year to date.

BCE laid off nine per cent of its workforce in February, its largest restructuring in nearly 30 years, in the face of a softer growth outlook and a mobile price war with its competitors. On the same day, the company raised its dividend by 3.1 per cent — less than its usual five per cent pace.

The telecom then used the $4.7 billion it gained from selling its stake in Maple Leaf Sports & Entertainment Ltd. to purchase U.S. internet provider Northwest Fiber LLC instead of paying down debt, which topped $40 billion as of Sept. 30. The company also ruled out increasing its dividend for all of 2025 — after 16 years of boosting its payout annually — and said it will discount its dividend reinvestment plan.

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BCE shares fell to their lowest level in 12 years after the Nov. 4 announcement.

David Wahl, portfolio manager with ClearBridge Investments, called BCE a “disappointment” at a market outlook event on Dec. 12 in Toronto. Wahl said the MLSE sale would have been “a great way to shore up the balance sheet.”

“And then they went and bought Ziply,” Wahl said, referring to Northwest Fiber’s trade name. “Ziply, although it’s a great company and has a lot of potential, it kind of pulls on the strings of: Are you a dividend grower? Are you a growth name?”

Yaghi argued a dividend cut is what’s needed. He acknowledged the stock’s retail investor base would incur short-term pain, but over the long term, such a move would help the company build a more solid foundation. However, he doesn’t expect the company to trim the dividend when management provides its guidance for 2025 on Feb. 6.

“Do we think the dividend will eventually get cut?” he wrote. “The answer is yes.”

The Scotiabank team advised BCE to sell assets where rent costs outpace the costs of ownership, such as wireless towers and satellite business. It also suggested Bell merge its media assets with Corus in a separate public company, but doubted the firm would be open to the idea in the coming year.

Yaghi and his team nonetheless praised BCE’s corporate culture and said it continues to have significant advantages, adding that it “remains the industry bellwether.”

—With assistance from Melissa Shin.

Blomberg.com

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