CashNews.co
A dividend cut would be BCE’s (BCE.TO)(BCE) “best strategy” to enable further expansion into the U.S., Scotia Capital analysts say, as fierce competition and restrictive regulations in Canada push the telecommunications company to seek growth elsewhere.
Analyst Maher Yaghi writes that BCE’s failed bid for U.S. fibre internet provider Frontier Communications — a company ultimately snapped up by U.S. giant Verizon — is a “big tell about the company’s U.S. ambitions.” Yaghi argues that a dividend cut offers the clearest route for BCE to finance those hopes.
“While cutting the dividend could cause some pressure on the stock in the short term,” Yaghi wrote, “we believe it is the best strategy to position the company to have a more flexible balance sheet to undertake additional [mergers and acquisition] transactions in the U.S. if deemed needed but more importantly provide the company with additional capital if competitive intensity in Canada remains elevated.”
In early November, BCE ended up purchasing Ziply, an internet provider in the U.S. Pacific Northwest, a move mostly funded by the sale of its stake in Maple Leaf Sports & Entertainment (MLSE). It says it would pause dividend growth in the wake of the purchase, and fund the balance of the deal through a dividend reinvestment plan that would allow shareholders to put their cash dividends towards discounted shares.
BCE’s shares plummeted nearly 10 per cent to $40.47 on the day the Ziply purchase was announced. Disappointing third-quarter earnings pushed the stock down further a few days later, and it remained below $38.00 in Monday afternoon trading.
Nevertheless, Yaghi writes that investors should not expect a dividend cut now, unless the company does move on “another material U.S. acquisition” or if the CRTC, Canada’s telecommunications regulator, “significantly” lowers its mandated wholesale price for access to Canadian fibre-to-the-home networks. (That wholesale price, designed to increase broadband competition by letting smaller players use the major telecoms’ infrastructure, is at an interim rate but is set to be finalized at some point in the future.)
The Canadian regulatory environment, along with “persistent broadband pricing pressures” in Canada and an extremely competitive mobile phone landscape, have led BCE to seek better opportunities in the U.S., Scotia says. The Ziply acquisition on its own is “not enough to move the financial needle for BCE on a consolidated basis,” Yaghi writes.
“Thus, we think the company will likely undertake additional market expansion efforts to drive meaningful financial growth, which aligns with management’s stated openness to pursuing further fibre acquisitions in the U.S. market.”