BCE Inc T.BCE

Scotia about dividend policy

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Capital Recycling and Dividend Policy - Evaluating Options

OUR TAKE: Mixed. We believe BCE’s unsuccessful bid for Frontier is a big tell about the company’s U.S. ambitions. While Ziply should see 15-20% EBITDA growth in the coming period, its acquisition will likely add only 50bps to our estimated BCE organic EBITDA growth rate begging the question of how much more BCE is going to invest in the U.S. Apart from it ownership in the Habs, divesting either the satellite, wireless towers, media or any of the company’s regulated rural Canadian telecom assets will likely lead to a loss in FCF making capital recycling into the U.S. more complicated than having sold MLSE to fund Ziply. It is plausible to assume that any additional material acquisitions in the U.S. could lead to a review of the dividend and/or an equity issuance if an asset sale is not secured beforehand at attractive valuations. While we expect management to be very diligent in any upcoming M&A transaction, we believe the stock will likely remain range bound until more clarity is provided pertaining to the core assets that BCE will retain long term within its ongoing capital recycling strategy and the dividend that these assets are able to support.

KEY POINTS

Our view on 2025. We are not expecting the dividend to be cut at this stage unless the company undertakes another material U.S. acquisition or the CRTC significantly reduces wholesale rates on FTTH below the recently provided $68.94 interim tariff. The reason for our flat dividend for 2025 is based on the fact that the newly implemented discounted DRIP (while diluting shareholders by around $1-1.3B/year) according to management “will support improvement of ‘the’ dividend payout ratio and deleveraging”. Based on our estimates however, and even assuming 30% participation in the DRIP, the company is expected to have a dividend distribution ratio as a % of FCF (including capital leases) of 125% in 2025 and 103% in 2026 only to come below 100% in 2027 and then declining towards 82% in 2030 (see exhibit 1). Hence, we are not expecting any deleveraging in 2025 or 2026 unless the company divests of additional assets. We are expecting BCE to undertake another material cost-cutting initiative in 2025 in the same size as the one they had announced earlier this year. On an organic basis, we expect 2025 guidance to be around -2 to +2% on the topline (we are forecasting +0.4%) and -1 to +2% on the EBITDA front (we are forecasting +0.4%).

What’s next on the Ziply/U.S. M&A front? Given the size of the Ziply transaction and the fact that the acquirer here is a foreign entity, the FCC could recommend a deeper review of the deal similar to Searchlight Capital’s proposed acquisition of Consolidated Communications. Elevating the review could bring the file up to be reviewed by the White House. While we don’t see a reason for this transaction to be blocked, a Trump administration could add some uncertainty if this gets entangled with other U.S./Canadian trade issues and potential reciprocity prerogatives that the U.S. could request. Again we are not forecasting any hiccups in the deal, but closing could be pushed out if a fuller review by the DOJ and the White House is required.

Other assets that BCE could look at in the U.S. While we expect management to be diligent as usual in reviewing potential M&A deals, we do see the company undertaking additional M&A in due course to complement its foray into the US. This could be in the form of an outright asset acquisition like Ziply or the establishment of a JV with a similar structure like the ones that AT&T and T-Mobile have established in order to expand their fiber footprints. We discuss later in the report a couple of assets that could be of interest to keep an eye on.

Should BCE cut the dividend? If the company is seriously looking to expand its business in the U.S. we believe that the board should consider cutting the dividend. As per our FCF scenario below, while the DRIP will lead to some deleveraging starting in 2027, it will be hard for the company to remove the DRIP without bringing FCF distributions (including lease costs) above 100% before at least 2030. A situation that will continue to dilute shareholders by $1-1.3B per year and increase future dividend funding needs whenever the DRIP is lifted. While cutting the dividend could cause some pressure on the stock in the short term, we believe it is the best strategy to position the company to have a more flexible balance sheet to undertake additional M&A transaction in the U.S. if deemed needed but more importantly provide the company with additional capital if competitive intensity in Canada remains elevated.Why is BCE recycling capital into the U.S. BCE’s recent acquisition of Ziply Fiber was a strategic push into the U.S. market, reflecting management’s view that Canadian telecom regulations has become too restrictive and could hinder the company’s long-term growth. This decision also signals BCE’s expectations of persistent broadband pricing pressures in Canada, further solidifying a case to seek growth opportunities beyond its domestic market. The U.S. fiber market represents a significant opportunity, with only 51% of homes having fiber access vs. 75% in Canada, and fiber continues to gain significant share over cable. Unlike Canada, the U.S. fiber market is also driven by retail competition without mandated wholesale access, making it an attractive opportunity for BCE. Ziply is one of the leading broadband providers in the U.S. Pacific Northwest with 82% of residential internet subscribers already on fiber. Its markets benefit from favorable demographics including no overlap with VZ and AT&T, less overbuilding activity, and limited competition from FWA. Hence, BCE recycling capital away from Canadian and into U.S. assets is a growth opportunity that offers geographic diversification while generating potential for higher ROIC over time. Fiber remains a critical asset for telco operators, and while this acquisition aligns with BCE’s core competency in fiber, it will take time for us to assess whether this was an optimal growth strategy compared to other capital allocation alternatives such as stock buybacks.

 

Further M&A needed to move the needle. As we have discussed in previous notes, BCE’s acquisition of Ziply Fiber is expected to be dilutive to FCF in the near term due to high customer acquisition costs and significant capex for fiber expansion. To support the transaction, BCE also announced a pause in their dividend growth in 2025 and has implemented a discounted DRIP, which should help reduce leverage starting in 2027. As it relates to revenue and earnings, Ziply Fiber is projected to generate US$700M in revenue and US$400M in EBITDA, contributing less than 1% growth to top- and bottom-line growth on a consolidated basis. We think this contribution to growth is not enough to move the financial needle for BCE on a consolidated basis. 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 fiber acquisitions in the U.S. market.

 

BCE’s U.S. expansion ambitions evident early in Frontier bid. BCE's unsuccessful bid for Frontier Communications highlights its strong ambition to enter the U.S. market early on, with the willingness to deploy nearly $18B. This represents more than ~3x the cost of Ziply Fiber. When comparing the two fiber transactions, BCE actually paid more for Ziply than VZ on a per-fiber passing basis at ~US$3.9K vs. US$2.8K, with a lower comparable synergy potential per fiber passing vs Verizon. What's positive however is that from an operational perspective, Ziply’s fiber as a % of total passings is higher than Frontier, and Ziply’s retail subscribers on fiber is also 9% higher. However, the % of revenues that Frontier generates from fiber is slightly better than Ziply as a % of total consolidated revenues.So far, Ziply Fiber has achieved 40% penetration within its footprint without convergence, highlighting an untapped opportunity for BCE as they continue to grow their subscriber base. To remain competitive in the long run, we think BCE will need to offer wireless services in conjunction to internet, leveraging convergence to capture incremental penetration gains. In such a scenario, BCE would likely pursue an MVNO or commercial agreement, similar to Comcast’s approach which helped them to launch wireless offerings in the U.S. We believe this is an important step for BCE as it will be difficult to compete effectively long-term against other players with a national U.S. presence like Comcast and Charter who sell converged wireless and wireline products. We think offering bundles is also critical to help manage churn while increasing customer lifetime value.

Is there appetite for more fiber acquisitions in the U.S.? Fiber asset consolidation continues to be a trend in the U.S. market as operators seek to meet growing demands for high-speed connectivity, reduce capital deployment inefficiencies, and position themselves as leading broadband providers. Thus, aside from the Ziply Fiber transaction, we wouldn’t be surprised if BCE were to explore other fiber opportunities in the U.S. Fiber remains under-penetrated in households vs Canada, which provides greater runway for growth. We think BCE will continue to be diligent in exploring other expansion opportunities in the U.S., ensuring that there’s strategic alignment with their overall fiber strategy and potential to yield high returns. Below, we highlight a few fiber operators of meaningful size that could be attractive to BCE in the medium term.