BCE, short for Bell Canada Enterprises (BCE), one of Canada’s big-3 telecom providers, has had a 2024 to forget, at least from a shareholder perspective. For the year, BCE shares are down nearly 50% on the NYSE (a smaller loss on the Toronto-listed shares due to a weakened CAD). Already facing financial pressures, the company is dealing with a revolt over its capital allocation after the much-criticized acquisition of Zipfly Fiber.
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Shareholders have voted with their wallets, and BCE stock is down more than 30% in the past 8 weeks following the announcement of the acquisition in the U.S. Northwest. Growth has fallen negative, and now the company is bleeding investor sentiment. The company’s long-celebrated dividend, which now yields almost 12.5% seems destined to be cut in 2025. What could that mean for BCE stock?
I hold a contrarian Buy rating. Let’s dig in.
BCE Financials
Looking back to the past decade (2014-2024), you’ll see stunted growth for telecoms. Many operators have actually reported flat or negative top-line results over the period. BCE’s revenue is about where it stood 10 years ago. Meanwhile, slight margin gains have been eaten up by increased debt costs. Cash Flow from Operations (CFO) has remained relatively steady, but Cash From Investing (CFI) has been eating up a bigger chunk of those inflows. This is a capital-intensive industry, and major players have been constantly investing in upgrading their networks.
While the fourth quarter tends to deliver an uptick for telecoms, and we don’t know how the October-December period will look for BCE, it’s worth comparing FY 2023 to the trailing annual results. Top-line revenues are down about 3% from $18.62 billion to $18.09 billion. While margins have made consequential gains, it hasn’t been enough to generate higher gross profits.
TTM’s Operating Income is down somewhat to $4.13 billion, and that’s often where the story ends. However, BCE’s increased debt profile is associated with a higher rate environment. The company’s interest expense over the past 4 quarters has been $1.24 billion, nearly 50% higher than where this line stood just 2 years ago in 2022.
BCE technically reported a large Q3 loss due to impairment charges of CAD 2.1 billion, but even normalized EPS dropped when the charge was adjusted. The impairment change was attributed to, “a further decline in advertising demand and spending in the traditional advertising market“. I spoke earlier about the industry’s heavy capital investment — the last thing shareholders want to see is a write-off of those expensive investments.
BCE’s non-GAAP EPS for the past four quarters has been CAD 3.01, translating to $2.10 at the current exchange rate. On that basis, BCE stock is trading for less than 11x P/E.
Recent Corporate Moves
As a surprise to many, on September 18, BCE sold its 37.5% stake in Maple Leaf Sports And Entertainment (MLSE), which owns and operates major sports franchises in the Toronto area, including the Toronto Maple Leafs, Toronto Raptors, and championship Toronto Argonauts. The buyer was telecom competitor Rogers Communications, and the price tag on the stake was CAD $4.7 billion. The Leafs alone were appraised at a value of $3.8 billion, substantially higher than the $1.5 billion price tag on the team in 2019. The sale is interesting because this non-core asset was the source of steady value growth, while BCE’s operating business has not!
Why the company decided to pull the trigger on a sale is unclear, as the stated goal of “financial flexibility” seems to have been reneged upon. Despite sputtering in the NHL playoffs, the Maple Leafs have been among the top teams in recent regular seasons. So far, from 2024 to 2025, they sit 7th in the NHL, seven points behind the Winnipeg Jets. BCE shares rose on the announcement date, while Rogers (RCI) shares dipped.
To the surprise of many, BCE didn’t use the MLSE sale proceeds to reduce its nearly $30 billion debt balance. Less than seven weeks later, the company announced the acquisition of Zipfly Fiber, whose cost used all of the MLSE proceeds and a bit more.
Shareholder Disdain
Those hoping for a deleveraging at BCE were taken off-guard by the Zipfly acquisition. Another expensive investment in a capital-intensive industry amid an already precarious balance sheet was not what investors were expecting. Especially just as BCE was reporting a sizable impairment of its existing telecom assets, this seemed like a punch in the gut.
Shareholder trust also seems to have been eroded. BCE management had specifically guided that the MLSE proceeds would be used “towards reducing debt levels,” so spending even more than those proceeds on a near-term acquisition was a real volte-face.
Of further aggravation to some shareholders was the fact that the Zipfly deal isn’t expected to be cashflow-accretive to BCE until 2028. Near-term returns from this acquisition appear to be a pipe dream.
Contrarian Hopes
While Canada’s Big-3 telecoms have experienced retreating stock prices (amid heated pricing competition), BCE has significantly underperformed the group recently. While debt-level concerns have merit, I tend to attribute a chunk of BCE stock’s underperformance to management’s unexpected reversal. Interestingly, the company’s debt metrics actually look better than those of its two peers.
In my view, there’s also no particular reason to distrust BCE management. As mentioned previously, telecoms have been struggling, and perhaps the company saw an unexpected opportunity to make an accretive acquisition in the current environment. I do hope that BCE decides to hold the purse strings tightly for the foreseeable future, however, and I wager that it will, given the harsh reaction by investors to the Zipfly deal.
BCE’s dividend of CAD $3.99 per share now represents a 12.3% yield at the stock’s December 30 closing price. That’s substantially above 4.6% for Rogers and 8.3% for Telus. As many have suggested, the market is already pricing in a dividend cut, and I think there’s substantial truth to that. In such situations, the rumors and anticipations can push a stock lower than if the company just ripped the bandage off and announced a dividend reduction. While stocks typically move higher on increased dividend news, this is one case where I feel that a dividend reduction could very much help BCE shares establish a bottom.
How Do Wall Street Analysts Rate BCE Stock?
None of the Wall Street analysts who cover BCE rate the stock a Buy. Of the 10 analysts, eight rate shares a Hold, while 2 analysts rate the stock a Sell. The average BCE price target, however, is $28.18, more than 25% higher than the recent share price.
Conclusion
Sentiment in BCE stock is extremely low, and the recent decline has likely been extended due to tax-loss selling for 2024. Investors will wake up in 2025 to see BCE shares at a historic lowand a P/E ratio less than 11x. Hindsight is 20/20, but it’s possible that the company struck perfect timing to crystalize gains on MLSE and invest at a discount in a downtrodden telecom industry.
While a possible 50% reduction in the stock’s dividend is certain to hurt retirees who have counted on the income, I wouldn’t expect it to create a further shareholder exodus from here. The capital value of BCE shares is already severely damaged, and cutting the dividend in half would still leave the yield above 6%, which would be a competitive rate.
Another reason I’m bullish on BCE shares from here is the lesson that management has surely learned from their recent corporate actions. I’d expect them to steer away from any other accretive acquisitions and reduce the debt balance from here. That will be a slow process and require patience, but patient investors will likely be rewarded in the longer term.
