Back to top

Analyst Blog

Canada’s largest telecom carrier BCE Inc. again boosted its shareholders’ return by increasing its dividend payout and share repurchase. The company raised its annual dividend by 5% to C$2.17 per share for the next year, maintaining its track record of dividend growth.

BCEhiked its dividend seventh times in the past two years, representing an increase of 49% since the fourth quarter of 2008. Currently, BCE pays an annual dividend of C$2.07 per share. Thenew payout would start from the first quarter of next year, payable on April 15, 2012 to shareholders of record as of March 15, 2012.

With the increase, BCE still maintains its dividend payout ratio policy of 65% to 75% of adjusted earnings per share. Further, the company will repurchase as much as $250 million of shares over the next year. Since December 2008, BCE has repurchased C$1.5 billion of its shares.

In addition to its dividend hike and share buyback program, BCE also plans to make a voluntary payment of $750 million on its defined benefit pension plan by this year-end to reduce its future pension obligation. Being fully tax-deductible, the payment would boost its free cash flow by $170 million next year and be accretive to earnings, net of financing costs, by 3 cents per share.

We believe substantial cash flow generation and ample liquidity provide the company with financial flexibility. The move shows the proper use of surplus cash amid falling interest rates and weak returns on equity. Despite these strong efforts, the company’s revenue continues to face pressure from operations that are lagging in the Internet protocol TV (IPTV) roll out. BCE is experiencing a declining APRU (average revenue per user) – the lowest among the three national carriers – largely due to decreasing voice usage and roaming as a result of softness in the Canadian economy.

Further, the company’s revenue mix is heavily weighted toward traditional telephone business, the demand for which is gradually waning. Moreover, BCE operates in an environment crowded with new wireless carriers. Bell Canada, a 100% subsidiary of BCE, faces cutthroat competition from national carriers Telus Corporation and Rogers Communications Inc. .

The company generated flat year-over-year revenue (excluding its CTV acquisition) in the first nine months of this year while its major rival Telus recorded 6.5% growth in the same period. Being a reputed competitor in IPTV, Telus is benefiting from lower wireless competition in western Canada. Despite the dilution in the recent quarter, Telus raised its dividend by 10% as opposed to 5% hike at BCE for 2012.

Hence, we prefer to maintain our long-term Neutral rating on the stock with the Zacks #3 (Hold) Rank.

Please login to Zacks.com or register to post a comment.