BCE Inc. investors have enjoyed a profitable ride over the last three years. But with revenue growth from telecom services almost non-existent year-over-year, the question is whether the journey ahead will be as lucrative.
President and chief executive officer George Cope took the helm of the country’s largest telecom in 2008, with a razor sharp focus on operations and a vow to turn BCE into a “dividend growth” company.
He has delivered on that promise, overseeing seven dividend increases in three years. The stock offers a yield of 5.2 per cent today and BCE shares have risen 14 per cent during the period.
But the billions of dollars spent on dividend payouts and share buybacks have come largely from cutting costs rather than raising revenue. There is concern among some analysts that this strategy has run its course.
On Thursday, BCE is expected to post fourth-quarter revenue of $5.2-billion and earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.9-billion. That translates into growth of about 10 per cent and 8 per cent, respectively. But strip out the contribution from CTV Inc., which BCE acquired last April for $1.3-billion, and revenue shows an “organic” decline of nearly 2 per cent and flat EBITDA, says analyst Dvai Ghose, head of research at Canaccord Genuity Corp.
The long-term benefit of the CTV acquisition is unknown, but analysts’ concerns about the deal include the cyclical nature of media as well as a regulatory decision last year that effectively curbed BCE’s plans to sell CTV content to competing mobile phone providers.
Mr. Ghose argues that BCE has delivered on dividends not only by slashing costs and managing its taxes smartly, but also by holding back on investments that are essential for driving growth. The company rolled out its Internet Protocol TV (IPTV) service only a few months after rival Telus Corp. in 2010, but trails the Vancouver-based company in both investment and subscribers, he says.
“Bell hasn’t made the [same]investment and as a result has very little subscriber growth in TV,” Mr. Ghose says. “You get what you pay for.”
Bell’s IPTV infrastructure reached 2 million homes at the end of the year. In comparison, Telus passed 2.2 million homes in mid-2011, he wrote in a report last week. “While this helped Bell’s ... cash flow and BCE’s historic dividend growth, the strategy may have been short-sighted and may not have maximized longer term cash flow potential.”
BCE’s Bell Canada will need to spend another $3-billion to complete its IPTV network by 2015. Unfortunately, the company has been unable to increase cash flow from its wireless business as fast as Telus has, which will make it harder for BCE to absorb the extra costs, Mr. Ghose says.
IPTV is important to telecoms because it is usually sold as a bundle of services that can include high-speed Internet access, home phone and wireless. As such it’s an essential tool in offsetting the heavy losses in land-line connections that the phone companies have been suffering for years.
Analysts estimate that Bell added 28,000 subscribers to its Fibe TV service. In comparison, Phillip Huang, of UBS Securities Canada Inc., estimates that Telus added 52,000 subscribers to its Optik TV service.
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