BCE Inc. gave investors a bit of holiday cheer by boosting its dividend 5 per cent for 2012 and announcing a share buyback, but revenue challenges at the telecom giant are casting doubt on its ability to keep increasing dividends beyond the next few years.
In particular, the Montreal-based parent of Bell Canada is facing an inevitable comparison to smaller rival Telus Corp., which some analysts say is presenting investors with a more compelling growth outlook. They argue that while dividend increases are sustainable at BCE for at least three years, Telus is growing both dividends and revenues at a healthier clip.
Eager to reinforce its reputation as a dividend-growth company, BCE announced Thursday that its annual common share dividend will increase by a dime to $2.17 per share for 2012. The hike takes effect with its first-quarter payment in April.
BCE said the planned dividend hike marks its seventh increase over the past three years and stressed this latest increase means its annual common share dividend has grown 49 per cent since the fourth quarter of 2008.
George Cope, BCE president and chief executive officer, said the dividend increase was buttressed by the company's outlook for continued earnings growth and strong free cash flow generation.
“This reflects our confidence in delivering on our business plan, based on the Bell team's strong execution of our strategic imperatives and reinforced by a healthy balance sheet with ample liquidity,” said he in a release. “We have the financial flexibility to reward shareholders, while supporting significant ongoing capital investment in Bell's broadband networks and services.”
BCE said its share buyback program, designed to bolster the company's share price, would take place over 12 months beginning Dec. 12. Under the program, it plans to use year-end 2011 surplus cash to repurchase up to 6.5 million common shares worth a maximum of $250-million.
BCE also said it will make a $750-million voluntary pension contribution this month. That move is expected to generate tax savings, while lowering the company's future pension obligations. It also reconfirmed guidance that its 2011 adjusted earnings per share would be $3.10 to $3.15, while revenue growth at its Bell Canada division would range between 9 and 11 per cent.
“The new share buyback program and voluntary pension contribution represent a well-balanced use of surplus cash,” said chief financial officer Siim Vanaselja.
On an otherwise negative trading day on the Toronto Stock Exchange, BCE's shares gained 42 cents to $40.60, while Telus's share lost 26 cents to $55.43.
BCE's management has done an excellent job cutting costs, said Dvai Ghose, an analyst with Canaccord Genuity. His main concern, however, is that BCE has recorded flat year-over-year revenue for the first nine months of 2011 (excluding its CTV acquisition) versus 6.5-per-cent growth at Telus.
“My point is quite a simple one, there is no revenue growth at the company,” Mr. Ghose said in an interview. “So how do you increase your dividends (on a long-term basis) if there is no revenue growth?”
Analysts say the revenue challenges facing BCE are complex. Part of the problem is that BCE has yet to embark on an aggressive rollout of its Internet protocol TV (IPTV) product to further up the ante on traditional cable operators, and continues to lag other telecom incumbents on key wireless metrics.
Moreover, its revenue mix is also more heavily weighted to its traditional telephone business at a time when more consumers are ditching their land lines.
Telus, on the other hand, is a more established player in IPTV, while also benefiting from less wireless competition in Western Canada, its traditional home base.
“Telus has done a lot more heavy lifting. They've done the whole IPTV, they've added a huge customer base,” said Mr. Ghose. “They've had huge dilution as a result, and still increased their dividend by 10 per cent this year as opposed to five per cent at Bell for next year.”
Greg MacDonald, an analyst with Macquarie Capital Markets Canada Ltd., wrote in a research note that BCE “will likely remain a safe haven go-to stock in the current environment.” Still, he noted his top telecom pick is Telus “mainly because of its superior dividend growth and operating growth.”
He added: “This second distinction may grow in importance as overall rates remain low, but both stocks should remain in favour in such an environment.”
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