How safe is BCE's Dividend

[arthur]

A Yummy 6.5%, seems too genrous and one has to wonder what the market is telling us???

I have sold all holdings, locked in Capital Loss, and am in a position that I can now buy back in????

[iluvnascar]

It may seem overly generous......but the market isn't paying for yield these days. All that matters is "Growth Prospects".....and BCE is not a growth company.

We have Telus yielding 6.2%; MTB yielding 7.9%; BCE @ 6.5%. Even the growth companies like Rogers and Shaw are cheap and yield 3.9% and 4.4%. Meanwhile, MM pays 0.5% - 1.00%. There are numerous other examples.

[glenfro]

It may seem overly generous......but the market isn't paying for yield these days. All that matters is "Growth Prospects".....and BCE is not a growth company.

If the market is'nt paying for yield these days, I think it soon will be.
A lot of income starved investors are going to be absolutely shocked when their GICs mature and they discover that the best they can get from our big 5 is 0.40% for 1 year terms, or 0.50% from premium MM funds. Where else can they get those kind of returns?

Telcoms usually perform quite well during recessions, and with a PE of 24, and a payout ratio of 72%, BCE's div should be sustainable. Even if they revert back to their average POR of around 60%, a 16% div cut would not be a big deal, especially if it's anticipated.

I find it hard to argue with David Baskin, that utilities, pipelines and telcoms may offer the last opportunity to lock into those yields before their prices get driven up by all that cash from maturing GICs.

[Bylo Selhi]

the best they can get from our big 5 is 0.40% for 1 year terms

As it happens yesterday BNS quoted me over 50% more than that, 0.65%. I'll be picking up cheques for the principal when it matures next week

[iluvnascar]

It may seem overly generous......but the market isn't paying for yield these days. All that matters is "Growth Prospects".....and BCE is not a growth company.

If the market is'nt paying for yield these days, I think it soon will be.
A lot of income starved investors are going to be absolutely shocked when their GICs mature and they discover that the best they can get from our big 5 is 0.40% for 1 year terms, or 0.50% from premium MM funds. Where else can they get those kind of returns?

Telcoms usually perform quite well during recessions, and with a PE of 24, and a payout ratio of 72%, BCE's div should be sustainable. Even if they revert back to their average POR of around 60%, a 16% div cut would not be a big deal, especially if it's anticipated.

I find it hard to argue with David Baskin, that utilities, pipelines and telcoms may offer the last opportunity to lock into those yields before their prices get driven up by all that cash from maturing GICs.

I sure hope you're right. I've been waiting....and waiting....and waiting for it to happen. I'm getting very impatient.....but still holding lots of BCE, Bell Alinat, and Telus.....with a little bit of Rogers. I had sold call options on all my Shaw and Transalta and was assigned at close of business yesterday....I plan on re-initiating postions in those companies.

[ghariton]

From the Globe & Mail

Canada's two largest communications companies are at war in Central Canada as they play a high-stakes game to hold off new competition.

Rogers Communications Inc. (RCI.B-T29.58-0.04-0.14%) fired the opening round recently, with a move to spur growth in its home phone business by effectively eliminating highly profitable long-distance fees on North American calls for some new accounts.

Its largest rival, BCE Inc.'s (BCE-T23.51-0.24-1.01%) Bell Canada, has responded in the last few days with significant cuts to its own U.S. and Canadian calling fees, and has extended the fight to television and wireless.

Both players have launched expensive marketing campaigns targeting the other, and yesterday they accused one another of slinging misleading information. The unusually heated exchange occurs as Bell and Rogers begin trying to lock in customers with enticing plans in advance of four new wireless operators that plan to enter the Canadian market by early next year.

If the price wars are severe enough, the entire dividend may be at risk.

George

[kcowan]

If the price wars are severe enough, the entire dividend may be at risk.
George

Never the entire dividend, George! But your point is well-taken. If they keep this up and maintain their dividends, their payout ratios will become unacceptable to serious investors.

OTOH it is great for the consumers. Just wait until all the new competitors emerge. VOIP, bitTorrent, WiFi Phones, wow I can hardly wait.

BTW I have been using MJ for the whole season and the voice quality is better than Yak and Telus for LD. Still use Rogers for wireless though...

[schmuck]

If the price wars are severe enough, the entire dividend may be at risk.

Why stop there?
Could bankruptcy from a spiteful pissing match be a bit too alarmist for you?

[ghariton]

Could bankruptcy from a spiteful pissing match be a bit too alarmist for you?

You seem to find my post distressing. If so, I'm sorry. But I calls 'em as I sees 'em.

Reasoning by analogy is always risky, as analogies are never that close. But I am drawn to the analogy of the airline industry in Canada over the last thirty years.

Our airlines discovered the joys of competition in the early 1980s, and the attractiveness of price wars shortly thereafter.

Now the airline industry is characterized by three facts. First, fixed costs are high. Once you have designed your route network and committed to your schedule, there is little you can do to cut back on your costs.

Second, variable costs are low. Flying an extra passenger, when you have an extra seat, is peanuts, so to speak. And almost all flights leave with some empty seats (load factors in the 80s are considered extremely high.)

Third, the product is extremely perishable. If you don't fill that seat now, it is gone forever.

So the marketing people have huge incentives to cut prices just a little (or maybe a lot) and grab market share from competitors. After all, those extra passengers are gravy. The financial people, of course, don't like this at all. I remember huge battles between finance and marketing. Sometimes marketing won, and there would be a price war. Sometimes, finance won, and prices would stabilize or go back up.

All this was great for customers, but perhaps not so great for shareholders.

Back to the telecommunications industry. Large fixed costs? Check. Very low variable costs? Check. Highly perishable product? Check.

Now I don't think we will see outright bankruptcy of companies like BCE and Telus and Rogers, for the same reason we didn't see bankruptcies of banks despite all of their foolishness. There are massive externalities in the supply of telecommunications. Our economy could be paralyzed by a bankruptcy. So as a last resort governments will intervene and bail out the telcos if necessary.

George

[schmuck]

You seem to find my post distressing.

Much less so than unconvincing.

Competition is the essence of free enterprise and progress, and there's no need for BCE and Rogers to bludgeon each other to death. They can co-exist and prosper even if threatened by other new arrivals.

BCE has managed to pay a dividend ever since it started trading under it's current handle 26 years ago, and probably much longer as Bell Canada Ent., and it will take a helluva lot more that Rogers to run them out of Dodge, even if Ted was still around to lead the charge.

As for comparing telcoms with airlines, I could'nt think of a worse connection even if I tried. Airlines were brought to their knees by high fuel costs, while telcoms are cash cows once the infrastructure is in place. Not to mention that they compete with each other as improved (tel)communication makes personal travel less necessary.

[kcowan]

Financially, telecoms are more like power companies. Except for the competition and diversity of product offerings.

[ghariton]

Financially, telecoms are more like power companies. Except for the competition and diversity of product offerings.

I assume you're thinking of power distribution companies, rather than power generation companies. Yes, that's a gopd analogy too. High fixed ocosts, low variable costs, and a very perishable product. As you point out, there is little if any competition in most geographic locations, so the analogy does break down there.

For those who don't like airlines as an analogy, I can offer railways. Once again, we have high fixed costs, low variable costs, and a perishable proeduct, AND lots of competition -- some from other railways, but mostly from trucks, a bit from ships, and a lot from alternative locations.

Railways didn't do that badly, although US railroads had a couple of near-death experiences in the 1970s and Canadian railways had quite a few lean years as well. Government intervention in this sector was intense, both in terms of subsidies and regulation.

Most importantly, railways transformed themselves from general-purpose carriers into specialized carriers. Today they mainly transport bulk freight -- minerals, forest products, grain -- where the truck competition is at a disadvantage. They seem tro have made a success out of this retrenchment.

Pursuing the analogy, this suggests that the telephone companies should retrench as well, specializing in market segments where they are relatively protected from their competitors. Right now, the telcos have an advantage in business services, the more sophisticated, the better. They should abandon the residential market, and perhaps the small business market too, and refocus on large and very large enterprises. They could keep serving medium businesses for now, waiting to see where that market will go, but be prepared to withdraw here as well if the DOCSIS 3 standard proves to be successful (it would allow cable companies to provide DS-1 over existing facilities).

But I don't think that the telcos understand their situation. Or perhaps they do, but internal empires don't allow for radical change. Or perhaps they are afraid that a major restructure will scare away shareholders, sone of whom question whether any major change is necessary or desirable.

George

[ghariton]

BCE has managed to pay a dividend ever since it started trading under it's current handle 26 years ago, and probably much longer as Bell Canada Ent.,

I wonder for how many consecutive years General Motors paid a dividend.

it will take a helluva lot more that Rogers to run them out of Dodge, even if Ted was still around to lead the charge.

Videotron

Cogeco

DAVE

I note that Videotron, in particular, has a history of starting price wars.

Airlines were brought to their knees by high fuel costs

Steve Maich in MacLean's:

Oil prices are strangling airlines because the industry has exploded in size, and managed to lose all pricing power and efficiency along the way. ... The flood of new airlines and routes in the wake of deregulation yielded an unending price war that has begat zombie airlines, barely alive, slashing staff and service to the point that those who remain are deeply demoralized. Desperate for any revenue, they now charge for checked bags, seat selection, even a pillow. On US Airways, it'll cost you two bucks for a Coke, seven for a beer. But you have to sell a lot of drinks to make up the US$803 million it lost in the first half of this year.

The problem is too many people flying, all of them paying too little for their tickets, and it can't be fixed with nickels and dimes.

<snip>

For 30 years they have trained their customers to buy solely on the basis of price - viciously undercutting with no regard for profitability. Now, soaring oil prices have finally made that toxic game into a terminal one, and they want a legislated lifeline that would screw consumers so the airlines can get fat together.

telcoms are cash cows once the infrastructure is in place.

A cash cow is a cash cow only so long as someone is buying the milk.

George

[parvus]

In my experience, the telcos are fixated on upselling bundles. I was sceptical before the dot-bomb meltdown, and remain so today. The primary client is a 20something who wants Internet, cellphones, iPhones, and perhaps cable, all from one provider.

Why should this be considered the primary demographic. Well, consider moi. I'm middle-aged, get my landline, long distance and Internet from Bell. No cable (YouTube satisfies my needs). No interest in anything else. So, no growth from me. I suspect that will be increasingly the case as younger folks become middle-aged.

Now here's the kicker. Can the 20something demographic actually afford all the services the telcos want to bundle together? Between high-speed Internet and conventional telephony, I'm paying roughly $100 a month (some of which, fortunately, is deductible from my contract income).

What is the cost of an iPhone-Internet-cable package? I remain dubious that the intended demographic can afford to sustain the costs. As a consequence, it's a market share game, not a market growth one. IOW, winner take all.

[Bylo Selhi]

Well, consider moi. I'm middle-aged, get my landline, long distance and Internet from Bell... I'm paying roughly $100 a month (some of which, fortunately, is deductible from my contract income).

You're paying about 50% more than you need to.

Consider TekSavvy. Basic phone service is $22/month. Internet is $30/month. Unlimited LD in NA is $20/month (or 2.9¢/min a la carte.) Get all three and there's a $5/month discount so net it's $67/month plus taxes.

And the irony is that all of the services that TekSavvy sells are actually provided by Bell.

[This also explains why BCE's dividend will remain fat and secure -- as long as not too many people read this post ]

[mayday]

Bylo wrote:

As it happens yesterday BNS quoted me over 50% more than that, 0.65%. I'll be picking up cheques for the principal when it matures next week

Bylo, if the amount is over $5,000, BNS currently offers 1% interest in their Scotia Power Savings account.

http://scotiabank.com/cda/content/0,160 ... en,00.html

[kcowan]

Also there is the maturing of VOIP telephone services. Gradually those competitors will discover how to market to the mainstream, e.g. $10/mo for your existing phone number ported over and half a cent a minute for calls, fully loaded with caller ID and voicemail, a package of services that typically costs $50/mo from the telco (e.g. voip.ms).

My LD supplier, Yak, offers high speed internet for $33/mo compared to $42/mo from Shaw (without package discounts). So we are talking about inertia as the key safety factor for the telcos. Not a great barrier to protect their dividends...

(and then there is bitTorrent rather than cable or satellite TV service)

[ghariton]

we are talking about inertia as the key safety factor for the telcos.

Exactly.

George

[glenfro]

If the price wars are severe enough, the entire dividend may be at risk.

Gosh, I dont' even know what a telecommunications lawyer is, never mind pondering the thought of disagreeing with one...about telecommunication.

Just somewhat puzzled how astute gentlemen like Mr. Baskin, Mr. Cockfield, Mr. Campbell and Mr. Healy on BNN could fail to see what our George does, and be naive enough to believe that BCE could actually raise it's dividend.

[Bylo Selhi]

if the amount is over $5,000, BNS currently offers 1% interest in their Scotia Power Savings account.

Yeah, I realize that. I was being sarcastic about BNS' 0.65% 1-year GIC. Even the BNS account manager who quoted me that number seemed embarrassed that that's all they could offer, even to a supposedly "preferred" customer.

BTW the BNS Power Savings account's 1% rate is subject to change. There have been several downward moves in that rate already this year. The current rate could fall further. (Although I agree a further drop to 0.65% or below seems unlikely today.)

[ghariton]

Just somewhat puzzled how astute gentlemen like Mr. Baskin, Mr. Cockfield, Mr. Campbell and Mr. Healy on BNN could fail to see what our George does, and be naive enough to believe that BCE could actually raise it's dividend.

The market thrives on differences of opinion. If everyone agreed, there wouldn't be much trading activity (just new savings going in and cashouts coming out).

I'm not a financial analyst, I don't get to talk to CEOs, and I don't make my living by recommending stocks. If you want the views of a certified expert, you certainly shouldn't be listening to me.

But I've been watching this industry for twenty years now, and the transportation sector for another ten years before that. You might say that thinking about the impacts of competition on a regulated industry is my hobby.

If you have specific disagreements with the points I raise, I'd be grateful to hear them.

George

[parvus]

Well, consider moi. I'm middle-aged, get my landline, long distance and Internet from Bell... I'm paying roughly $100 a month (some of which, fortunately, is deductible from my contract income).

You're paying about 50% more than you need to.

Consider TekSavvy. Basic phone service is $22/month. Internet is $30/month. Unlimited LD in NA is $20/month (or 2.9¢/min a la carte.) Get all three and there's a $5/month discount so net it's $67/month plus taxes.

And the irony is that all of the services that TekSavvy sells are actually provided by Bell.

[This also explains why BCE's dividend will remain fat and secure -- as long as not too many people read this post ]

Thanks. I'll make a note of it. I'm sure that landline rates are competitive. With LD, everytime I call my mother, well discounted service more than comes through. As for the high-speed Internet, I don't know. (Must do a Mike Hammer. )

[arthur]

I am paying almost $200 a month to Bell for full package, including almost $80 a month for phone service, i think I need to talk to Rogers??

[iluvnascar]

I am paying almost $200 a month to Bell for full package, including almost $80 a month for phone service, i think I need to talk to Rogers??

Despite their claims, I doubt that Rogers is any less. Their aim is to make money - just like Bell.

For the record, I have Rogers cable; and Rogers Internet; and no cell phone. I have been getting "bundling discounts" from Rogers for what seems like forever. Three weeks ago, Rogers advised me that my "contract" had expired and there would be no more bundling discounts.....UNLESS I converted my home phone from bell to Rogers.

Their blackmail worked....I had no choice although I didn't want to do so.

[Bylo Selhi]

Their blackmail worked....I had no choice although I didn't want to do so.

Sure you did. You could have told Robbers to stuff it and then chosen to switch to Bell or TekSavvy or anyone but Robbers. By choosing not to, you encouraged the bastards to continue to gouge you and everyone else.