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Investor Education Heinzl’s mailbag: Relax, your BCE and Telus dividends are safe (and why payout hikes at the banks are imminent)

Do you think that the current controversy with Huawei will have any effect on the dividends paid by BCE Inc. (BCE) and Telus Corp. (T)?

No. Both companies could face short-term disruptions if the federal government decides for security reasons to ban China’s Huawei Technologies from supplying equipment for fifth-generation (5G) wireless networks in Canada. But your BCE and Telus dividends are not in any danger.

On BCE’s fourth-quarter conference call this week, chief executive George Cope said the company does not anticipate any significant capital spending or timing repercussions if – as seems increasingly likely – Huawei is blocked from participating in 5G.

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BCE has not yet chosen a 5G supplier, Mr. Cope said. “And if there was a ban or we chose a different supplier than Huawei for 5G, we’re quite comfortable all those developments would be addressed within our traditional capital intensity envelope and therefore [we see] no impact from a capital expenditure program outlook.”

In a note to clients, analyst Maher Yaghi of Desjardins Securities said that “this assurance from management should soothe investors who have become more anxious about this topic.”

In another sign of confidence, BCE raised its dividend by 5 per cent when it announced results this week, signalling that the company sees no material risks to its financial outlook.

“Management continues to have strong controls in place to deliver on the company’s stated 5-per-cent [annual] dividend growth model,” Mr. Yaghi said.

Both BCE and Telus use Huawei equipment in their existing 3G and 4G networks, but the potential security vulnerabilities are greater with 5G and “nobody expects Huawei equipment to be banned from existing networks in Canada,” National Bank Financial analyst Adam Shine said in a note.

“As such, a more significant and costly rip-and-replace effort is not anticipated to befall Bell and Telus,” Mr. Shine said. Banning Huawei from 5G would increase costs because the carriers would have to choose more expensive suppliers and might have to replace some of their recent spending, but the potential impact is “truly hard to quantify,” he said.

Telus is scheduled to release fourth-quarter results on Feb. 14, when it is expected to comment on the potential impact of a Huawei 5G ban.

Are you expecting any of the banks to increase their dividends in the first quarter? If so, which ones?

The banks will start reporting first-quarter earnings on Feb. 22, and you’re going to need a program to keep track of all of the dividend hikes.

In a note this week, Desjardins Securities analyst Doug Young predicted that the banks’ earnings per share will grow by about 5 per cent, on average, for the three months ended Jan. 31. The gains will be "driven by NIM [net interest margin] expansion in Canada, and in some cases the U.S., decent loan growth across various businesses, a benign credit environment, good expense control and share buybacks.”

Of the Big Five banks, Mr. Young expects that four will increase their dividends – namely Toronto-Dominion Bank (up an expected 10 per cent), Royal Bank (4 per cent), Bank of Nova Scotia (4 per cent) and Canadian Imperial Bank of Commerce (2 per cent). Because Bank of Montreal increased its dividend in the fourth quarter, it’s expected to sit out the dividend hike parade this time around.

Royal Bank (RY) will kick off earnings season on Feb. 22, followed by Bank of Montreal (BMO) and Scotiabank (BNS) on Feb. 26, National Bank (NA) and Laurentian Bank (LB) on Feb. 27, and CIBC (CM) and TD (TD) on Feb. 28. Mr. Young also expects a 4-per-cent increase from Canadian Western Bank (CWB), which reports on March 7.

(Disclosure: The author owns BCE, T, BMO, BNS, CM, RY and TD personally and (with the exception of BNS) in his model Yield Hog Dividend Growth Portfolio.)

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E-mail your questions to jheinzl@globeandmail.com.

Editor’s note: Adam Shine is an analyst with National Bank Financial. In an earlier version it was incorrectly stated that he was with Scotia Capital.
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