Smart investors grab long-term investment opportunities when others fear the short-term risks. One stock many investors have been avoiding is the telco BCE (TSX:BCE). The company has been in a lot of negative news because of its massive job cuts (4,800 layoffs) and opposition to the telecom regulator’s demand to open its network to competitors. Now, before we talk about the dividend-investment opportunity, it’s important to understand the short-term risk that has been putting downward pressure on the stock price.
Source: Getty Images
Why is this dividend stock in red?
The one thing that made Canadian telcos a lucrative investment was the lack of price competition among the three players that command 90% of the market. Each player spent billions of dollars to build the fibre infrastructure to provide seamless connectivity to vast lands of Canada with six time zones.
However, this changed when Rogers Communications merged with Shaw Communications. While Rogers focused on the merger, BCE and Telus Corporation invested aggressively in building 5G infrastructure and grabbing market share. They even started a price war because of which both telcos saw growth in subscribers as well as high churn rates. While the price war hurt their profits, so did the loan they took to build the 5G infrastructure as interest expense increased during the 2022-23 rate hike.
The telcos have put the price competition behind them and are now focusing on growing their 5G business. BCE is in the middle of a restructuring, converting a telco to a techno company. It is looking to monetize on the profitable margin-accretive subscriber growth instead of low-margin subscribers. The company has closed 107 electronic retail outlets of The Source and many of its radio stations.
BCE is now focusing on areas with fewer regulatory restrictions and more growth opportunities. While there are job losses in some segments, there are job opportunities in the fields of cloud services, digital ads, and cyber security. This transition has led to several short-term headwinds and reduced earnings per share (EPS). In fact, BCE expected a 3% to 7% decline in adjusted EPS in 2024 after a 4.2% decline in 2023.
The long-term dividend opportunity for BCE
All this increased its dividend-payout ratio beyond 100% in 2023. The twist came when BCE increased its 2024 dividend per share by 3% despite a high payout ratio and significant debt on the balance sheet. The 2024 will be a difficult year for the telco. But to move forward, one has to take a few steps back.
The next two to three years could see improving operating efficiency as BCE realizes cost savings from the restructuring. Moreover, accelerated interest rate cuts will significantly reduce interest expenses and be accretive to earnings per share.
The transition to techno will help BCE tap the networking opportunity 5G brings. The 5G will connect thousands of edge devices to the cloud through the internet and make artificial intelligence (AI) work at the edge. The era of AI at the edge will see high usage of drones, robotics, smart cameras and signals, and autonomous cars. All of this will scale up cloud operations and drive demand for secure connectivity.
BCE is looking to tap that opportunity. If it succeeds, it could monetize the 5G infrastructure investment for the next 10 years. Now is a good time to buy the stock while it trades below 30% from its average trading price of $68 and lock in the 8.7% yield.
Final takeaway
The telco has slowed its dividend growth to 3% in the light of the short-term headwinds. Even if the telco pauses dividend growth for a year or two, the setback could lead the way for a 5-7% dividend-growth rate for the years of 5G.
