BCE likely to suffer from the uncertainty about its dividend (gam)
Andrew Willis
This is a tale of two telecom companies -- BCE and Telus -- that are taking very different routes to the same destination.
Last spring, in the notes to its annual report, Telus revealed that to pay for its aggressive growth strategy, the company was contemplating cutting its common share dividend.
In Finance 101, investors learn that dividends are at the base of a stock's value, so the prospect of a cut helped to undermine Telus's stock for the better part of six months, with the price falling to $20 levels from $35.
In October, Telus finally chopped its quarterly dividend to 15 cents a share from 35 cents. In a seemingly perverse move, Telus stock promptly rallied by 25 per cent.
Robert McFarlane, chief financial officer at Telus, says the period of uncertainty around the dividend policy reflected the company's push to prove its prowess in growth markets, such as mobile phone and Internet data networks. He said: "If we did cut the dividend, we wanted to do it from a position of strength, having proven that we could hit, or exceed, our financial targets."
Mr. McFarlane is a realist: He knows the market hates uncertainty. Investors had a reason to avoid Telus when the payout was in limbo. The jump in Telus's price once the dividend was chopped reflected a vote of confidence from both income-hungry dividend investors, who finally knew what kind of payout they could expect, and growth stock buyers who bought in to a company that was taking tough steps to fund expansion.
Throughout this process, Mr. McFarlane said Telus executives had the luxury of setting their own agenda. Decisions around where to spend cash -- on dividends, debt repayment or capital spending -- were all made in-house.
Now, when the Telus chief financial officer looks at rival BCE, he sees a company and a dividend policy "that's in the worst possible position."
BCE is spending more cash than it's bringing in, and will be for several quarters to come. That alone calls the dividend into question. The conglomerate is also wrestling with the debts and capital needs of money-pit subsidiary Teleglobe.
But what's really going to undermine BCE in months to come is the fact that the company has no control over its largest financial issue, the potential repurchase of a 20-per-cent stake in Bell Canada now held by U.S. telecom giant SBC.
Yesterday, telecom analysts Stuart Isherwood and Chris Cullen of UBS Warburg said they see a "high probability" that the U.S. telecom company will force BCE to buy back the Bell stake this year for an estimated $6.7-billion. SBC can pull the trigger on the sale right through to 2004. The debt BCE would take on would cripple the balance sheet and make cash conservation a priority.
To date, BCE has not commented on its dividend policy or stock price. But if SBC seals its Bell shares, receiving a 25-per-cent premium to their fair market value, the UBS Warburg analysts see the dividend "at greater risk."
Such scenarios put BCE into a downward spiral that only ends when there's clarity on Teleglobe's finances and SBC's intentions. The market is now signalling it has lost faith in BCE's 30-cent quarterly dividend, a payout that was propping up the stock. A $40 stock last year, BCE closed yesterday at $25.05 on the Toronto Stock Exchange.
Again, it's handy to compare the experience at Telus to understand why the market is saying that BCE's is an endangered dividend.
Last October, the day before Telus finally cut its payout, the stock yielded 7.1 per cent for non-voting shareholders and 6.7 per cent for voting shareholders. In contrast, BCE shares had a yield of 3.3 per cent at the time, while Manitoba Telecom yielded 2.1 per cent. The gap between Telus and its peers tells you the market saw the cut coming.
Now the tables have turned. BCE's yield yesterday was 4.7 per cent. Telus now sports a 3.5-per-cent yield, while Manitoba Telecom is at 2.4 per cent. The higher yield points to a dividend that's at risk, and a company that doesn't control its own financial |
