RE:May exit.Hi SadieLadyCO. Exiting might be a wise choice. I was diversifying some of my holdings since I'm too heavy in oil and gas and was considering BCE. I've decided not to buy here. Below are my reasons.
Looking at the 1 year chart, it is clear the trend is not our friend. I don't believe a 7.8% yield will support the SP and change this downward trend because the payout ratio is so high and it will scare off long term investors that BCE needs. The payout ratio alarm bells are starting to ring.
BCE talks a good story about growth recovery but they are facing headwinds that will put more pressure on free cash flow. Here is the list of some headwinds I foresee:
1. The current and next generation is turning away from Fibe/Cable TV. This has been known for a while but because of inflation, younger generations can't afford it and their lifestyle is better suited to streaming. BCE invested a lot in Fibe TV, If this cord cutting trend continues, it will become an even bigger drag on earnings.
2. BCE operates 35 local TV stations, 26 specialty stations and still has 58 ratio stations after they sold some off. Again the current and future generations are turning away from this form of media. Even with the recent staff layoffs, this negative trend will again become a bigger drag on earnings.
3. This next one is a big concern for me. Recently the government of canada announced a 20% reduction in new temporary residents and a 35% reduction on foreign students. This represents 700,000 people who won't be coning to Canada each year. The majority of these imigrants would buy cell phones, data and internet plans and they have been a big source of growth for all the telecoms for the last few years. Removing 700,000 new people each year means the growth rate for all telecom will shrink and the only growth available will be through switching customers from the competition which requires deeper price discounts to accomplish. This will be a new drag on earnings for the next few years.
BCE right now is not in the best financial shape and the dividend is stretched to the limit. The headwinds outlined above will put downward pressure on earnings and free cash flow. The company is not going out of business but lowering the dividend could become necessary if my amateur crystal ball proves to be true. Anyway, for me a 7.8% dividend is not worth the risk.