These are difficult times for Canadian telcos. A price war in 2023 and high interest rates hurt the margins of telcos. The regulatory changes that required BCE (TSX:BCE) and Telus Corporation to open their fibre network to competitors at a discounted price have reduced the incentive to invest further in 5G infrastructure. Moreover, a reduction in immigration targets will slow subscription growth.
BCE expects revenue growth of -3% to 1% in 2025. A 3% revenue decline hints at a loss of market share. Should this revenue decline concern you in the next five years? Let’s find out.
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BCE’s strategy to handle crises
BCE has been through more difficult times in the last 20 years and has still delivered strong dividend growth over the years. If you look at the past two crises of 2008 and 2014, it adopted a similar restructuring strategy of reducing capital spending, repaying debt, selling non-core, low-margin businesses, and investing in high-growth, high-margin businesses.
The 2006-2009 period saw sky-high interest rates that made debt unmanageable and pushed the global economy to the Great Financial Crisis. During that time, BCE’s revenue stagnated, and high interest expenses hurt its profits.
At that time, it considered taking the company private through a leveraged buyout, but the deal fell apart due to a credit crunch. With that option out, BCE sold its Telesat business and lowered its capital expenditure and debt to revive business fundamentals. In 2008, the company paid dividends in only two quarters. In 2010, BCE returned to revenue and profit growth.
I took the 2008 reference to show BCE’s ability to come out of crises.
How BCE is tackling the current challenges
BCE’s challenges are different this time. The regulatory change to give competitors access to its fibre network has encouraged the company to change its business strategy.
Reduce capital spending: It has significantly reduced capital spending on building fibre networks from $5.1 billion in 2022 to $3.89 billion in 2024 and expects to further reduce it to $3.4 billion in 2025. A lower capital expenditure could boost free cash flow by 11-19% to $3.2 billion-$3.45 billion in 2025. This could ease its stretched dividend-payout ratio from 125% in 2024 to 104% in 2025.
Strengthen balance sheet: BCE is selling its non-core assets, such as Northwestel and MLSE. It will use the proceeds to buy new businesses such as Ziply Fibre and reduce the net debt leverage ratio, which stood at 3.8 times adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Since the debt is high, it has increased its liquidity position to $4.5 billion to pay for short-term commitments.
Focus on high-growth, high-margin business: In the last two decades, the internet disrupted wireline and voice calling. The era of 5G and beyond will enable an artificial intelligence (AI)-powered economy, which the internet alone cannot support. Such an economy needs a network and compute where BCE is investing. It is also focusing on digital media and advertising.
What to expect from BCE in the next five years
A restructuring in a difficult economy takes three to four years to yield results. A year has already passed, and 2025 could see another big dip before fundamentals stabilize in 2026. Lower immigration numbers and weak economic growth could stress the revenue in 2025 and maybe 2026. However, the acquisition of Zipley in the second half and a recovery in consumer spending capacity could drive revenue after two years.
I will not rule out the possibility of a dividend cut in 2026 if debt becomes difficult to manage. Long-term investors could think of it as offloading extra luggage to lighten the weight so that BCE can ride at a faster rate. While the next two years could continue to be challenging, BCE could return to growth by 2027 by monetizing on 5G opportunities.
Investor takeaway
In 2008-2009, BCE stock fell 44% from its peak in less than a year and grew 155% between June 2009 and September 2016. BCE stock has fallen 53% from its April 2022 high. While the stock has more downside potential, it has what it takes to recover and grow.
