BCE Inc. BCE-T has continued to fall since your column about its excessive dividend payout ratio appeared a month ago. I would have thought the shares would have hit bottom by now given that they are near a 10-year low. Can you explain what is going on?
The news flow has been especially unkind to BCE over the past several weeks.
In March, credit rating agencies S&P Global and Moody’s both revised BCE’s outlook to “negative” from “stable,” citing the company’s elevated debt ratios and intensifying competition in the telecom space. Both agencies maintained BCE’s current investment grade ratings, which are still a few notches above speculative status. However, they warned that a downgrade could occur if the company fails to make sufficient progress on deleveraging its balance sheet.
BCE likely saw this coming. Even before the rating agencies put the company on notice, BCE has been taking measures to strengthen its finances. It recently slowed its annual dividend growth to 3 per cent from 5 per cent, announced 4,800 job cuts and scaled back capital spending plans.
“More important, we believe the company is considering several non-core asset sales which could sufficiently reduce debt by 2025,” S&P said in a March 11 press release.
“Still, the timeliness (and eventual amount) of asset divestitures coupled with rising competitive risks … pose a risk that BCE’s leverage could remain higher for longer, in our opinion,” S&P said. “This underscores our negative outlook on the company’s ratings, indicating there is at least a one-in-three chance of downgrade within the next 12-months.”
Separately, BCE’s stock suffered another blow this week when BMO Capital Markets downgraded the shares to “market perform” from “outperform” and cut its price target to $46 from $54. In a note to clients, BMO analyst Tim Casey cited increasing wireless and wireline competition in Quebec and advertising challenges in BCE’s media business.
“While some of this is priced into the stock … we do not foresee a fundamental catalyst to revise estimates higher in the near term,” Mr. Casey said. BCE shares closed Friday at $44.75 on the Toronto Stock Exchange, and they have fallen nearly 14 per cent year-to-date.
BCE’s sinking share price has pushed its yield up to about 8.9 per cent, stoking concerns about the sustainability of the dividend. But Mr. Casey offered some soothing words in that regard: “We do not expect a dividend cut at BCE despite elevated payout ratios through 2025,” he said.
Whether the stock has hit bottom is anyone’s guess. But if the dividend does indeed survive unscathed, and if BCE can make sufficient progress on its debt metrics to stave off a credit downgrade, the shares could very well reverse – or at least stabilize – their recent slide.
I have a question about your model Yield Hog Dividend Growth Portfolio. If you were to create a similar portfolio of U.S. stocks and exchange-traded funds what would you choose?
My model portfolio already has some U.S. exposure through the iShares Core Dividend Growth ETF (DGRO). In fact, the ETF has been the portfolio’s top performer, with a price gain of about 77 per cent since the portfolio’s inception on Oct. 1, 2017.
One drawback of DGRO, however, is its modest weighting of about 16 per cent in information technology stocks, which have been a key engine driving the market higher. If you are looking to add U.S. exposure to your portfolio, you may want to consider a traditional S&P 500 Index ETF that will give you a tech weighting closer to 30 per cent.
Another advantage is that some S&P 500 Index ETFs trade on a Canadian exchange in Canadian dollars, sparing you the expense of converting your loonies into U.S. dollars at your broker’s unfavourable exchange rate. Examples include the iShares Core S&P 500 Index ETF (XUS) and the BMO S&P 500 Index ETF (ZSP), both of which charge ultralow management expense ratios of 0.09 per cent. If you’re looking to control currency-related volatility, you can opt for the currency-hedged versions of these funds, which trade under the symbols XSP and ZUE, respectively.
In my personal accounts, I get all of my U.S. exposure through ZSP (which I can buy and sell commission-free through BMO InvestorLine; several other brokers also offer free ETF trades). I used to own individual U.S. stocks as well, but with so many great companies to choose from south of the border, I prefer ETFs for the simplicity and diversification they provide.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl