Is BCE’s high dividend yield scaring you? Two reasons why it No one wants Canadian telecom stocks right now. That may be their most attractive feature.
From TD
These stocks are well below their recent highs, and the selloff has driven the dividend yields of two of them, BCE Inc. (BCE-T) and Telus Corp. (T-T), to their highest levels in at least 20 years. (Full disclosure: I own both.)
BCE’s yield, in particular, has been approaching an unheard of 9 per cent in bruising trading sessions for the stock in recent weeks.Yet, despite the alluring dividend, analysts who cover the telecom sector are remaining cautious ahead of an earnings season that’s unfolding over the next few weeks.
“It is difficult to recommend adding exposure to telecoms ahead of what we believe will be a tough quarter as we anticipate there could be additional downward estimate revisions,” Jerome Dubreuil, an analyst at Desjardins, said in a note this week.
Analysts point to slow revenue growth and high expenses related to restructuring activities and fibre network buildouts. Aggressive marketing campaigns, aimed at holding market share in an increasingly competitive wireless environment, aren’t helping matters either. Political pressure on immigration could tap the brakes on subscriber growth.
A mere four out of 14 analysts who cover BCE Inc. recommend the stock as a “buy,” according to Bloomberg. That’s a low level of enthusiasm, and it compares with nine out of 19 analysts who thought the stock was a buying opportunity a decade ago.
Analysts are more enthusiastic about Telus Corp., because its network upgrades are completed. Even so, the number of “buy” recommendations has been falling – to 11 out of 18 analysts, down from 15 out of 18 analysts just a year ago.
Some technical analysis, which looks at stocks using charts and data, is also suggesting that telecoms are best avoided.
Raymond James analysts showed earlier this month that Telus and BCE suffer from several poor indicators: Price momentum is weakening, the stocks are trailing the broader market, share prices have dipped below their four-year moving averages, and trading volumes suggest that institutional investors are reducing their exposure to the companies.
“All of these are technical negatives that suggest the path of least resistance is lower,” the analysts said in a note.
If BCE’s share price falls below $42.84, they added, the next stop could be $35.53, implying another 17 per cent slide.
That’s for a stock that has already fallen 40 per cent from its high in 2022. Lately, commentary about the stock has revolved around its dividend: BCE is distributing more cash than it is generating in net income, which is not sustainable over the long term. The high dividend yield could be a warning sign that investors are nervous about a potential cut.
So why stick your neck out – as I have, repeatedly and painfully – and consider telecom stocks a buying opportunity?
For one, the downbeat sentiment toward the sector suggests that a lot of bad news has been baked into the share prices already.
The telecom sector, on average, is now trading at 6.7-times EV/EBITDA – a popular valuation metric that compares share prices to enterprise value divided by earnings before interest, taxes, depreciation and amortization – according to CIBC Capital Markets. That’s considerably lower than the five-year average of 7.6-times.
If high dividend yields are flashing danger, at least in BCE’s case, then perhaps they are reflecting muted dividend increases or none at all, leaving little downside risk should the quarterly distributions stagnate.
Yes, a dividend cut would be terrible news. But that seems like a risk worth taking when yield is approaching 9 per cent. In the meantime, the current yield can deliver returns that are in line with the long-term performance of the stock market.
Another thing to consider is that telecom stocks are clearly being affected by the bond market. Stubborn inflation and rising interest rates have pushed up bond yields, and that’s weighing on stocks that are considered bond proxies.
The connection is clear. Telus and BCE shares rallied toward highs in 2022, when bond yields were exceptionally low. They slumped in 2023 as bond yields climbed toward multiyear highs.
The shares began to recover some ground late last year, when financial markets expected rate cuts. They have since slid, after reports of sticky U.S. inflation.
Sure, that’s a simplistic take on volatility that ignores competitive headwinds. But the view that inflation will eventually subside to acceptable levels seems reasonable, and could make a bet on today’s high-yielding stocks pay off over the longer term.
You could wait until sentiment toward the sector has improved and no one is worried about dividend cuts. But the stocks won’t be cheap then.