RE:RE:RE:Dividend safety
jx7000 wrote:
I, too, am looking to get back into BCE for their div stability and pretty good price appreciation. However, all this talk of inflation and interest rates going up in 2022 might put a damper on their stock price. What'ya think?
So your talking about a very large picture issue that I'm not gonna be able to do proper justice, but I'll try and discuss a couple points.
I don't feel interest rates will hurt BCE as much as it will hurt you and me and most of the rest of the buisness community. For several reasons but I'll hit a few here:
Not all thier debt is dependant on floating rates - I have no informed numbers to give you, but BCE carries a large portion of debt on the back of writing notes that have a fixed rate, an increase in general borrowing rates should not effect those notes, if anything make the metrics more positive, I'm sure a good portion of debt is affected by maybe .5-.75 increase of the prime but really it's not overpowering in the big picture. Many are fixed for several years.
Any rise in servicing the debt will be passed on or made up else where - if it costs more to operate, you better believe they are gonna charge the several million customers a small bit more, make it up on subscriber/services growth or something else within the buisness.
There is also an offset to be had with lack of 'roaming' - obviously for the most part society has been held within our boarders that the company has not be able to take advantage of travellers using our system or our customers paying larger amounts for roaming rates or plans to include roaming, with the re-opening happening we are gonna see that section rise.
We have just had record low rates and that has not really positively influenced price - you could argue under normal circumstances or normal borrowing rates over the years this entity has preformed much better, so why couldn't we return to historical valuations. We are only up 5% since the beginning of pandemic effects, yet I'm sure we have actually lowered the cost of our debt because of writing new notes with more favourable terms that we will have an advantage of for several years. Even with the prime rate moving up .5-.75%, we will still be 1.5-2% below the previous prime environment I believe, and these rate increases are going to take years to get back to normal after the massive drop in 3-6 months we received.
Does BCE offer better growth rate on its borrowings than it pays to borrow? - You have to question that if they are making gains on thier leverage even if the leverage and the subsequent rate is going up. Let's be honest, the vast majority of business do this regularly in any rate environment and I don't see this changing especially for this Blue Chip. Of course seeing borrowings and paying for them is ugly but for the most part it's essential and is countered with profits that usually out weight this. Rather over simplistic but is a fact. I would be concerned if BCE was on the edge of maintaining debt obligations currently, but that's far from the case here.
I'm sure there's lots more on this side of the topic and better information that will come from others better informed.
I think as a retail investor if your letting this specific issue effect your ideas of jumping in, adding, moving out or continuing to sit on the sidelines your playing a fools game. I would be more concerned about a general market pull back (kinda just had a flash one), new regulations from the higher powers, a philosophy change within the company management or other influence to us rather than a rising rate environment. I would almost say rising rates would be a good thing for share price as the investment community will reconsider or limit the investments into and of riskier, high leverage industries (like tech) that don't offer a dividend payout as a way of protecting thier capital, which should push our price higher.
Yes it will cost us more to service the debt which will show up in our numbers, but because of our size and abilities, it's effects are likely more muted for this entity than many others and individuals.
On a more retail investor focus and personal note: depending on how you borrow and your rates you may get in for a net positive just on the dividend return. For example I used a Margin account, I'm charged 4.05% in interest, if the bank follows that upward with thier rates I'll likely see 4.4 - 5.25% rates in a year time (I don't remember the rate before Covid but I believe it was lower 5%) yet the stock is paying out, 5.3 now and with the upcoming rate increase maybe around 5.6 ish forward (I'm not gonna do the legit math cause it changes daily), but your already getting a gain on the current rate and moving upwards forward. Others likely experience rates on Lines of Credit, Home Lines of Credit, or other borrowings sub 5%. An example of that would be Mortages at low rates, you could pay more to own your house or accept the sub 3% interest rates on mortgages if you have gotten in or re-upped recently, and invest in BCE and the interest difference and the rate of dividend return is double in some cases, and your 5/year fixed rate won't change where in year five your payout on cost of investment of BCE will be around 7% or more. You would be smarter to pay the bare minimum to your mortgage and invest extra money in BCE. Of course share price movements will effect your total returns, but I think the question is how far upward from your purchase price will the value be in the future looking at the long term for extra gains.
(the above is not investment advise and depends on individual situations... lol I have to use a disclaimer... but this is something for an individual to be aware of and understand where they fit and could take advantage)
I did add more BCE to my portfolio in the summer, actually added a position on margin (@ 54.80), as I already owned in my TFSA (@35.42)... but I have have taken several other positions in other companies since and look to add beyond BCE as I take advantage of these rates. One of the best features of BCE is the 70% margin allowance it has for borrowing on it, which I have leveraged up on with an even higher dividend that is growing at a higher and faster rate currently. My bet is dividends from many stalwart companies will beat the borrowing rate now and in multiples long term as the borrowing rate has a plausible cap that will be reached slower than growth will happen.