Shares of BCE Inc. continued their post-earnings slide lower to close off the week, shedding >10% following the release of some pretty uninspiring forward guidance.

With shares down >50% from highs in 2022, investors are likely considering current levels as a potential entry into a stable, high-yield Canadian telecom giant turning itself around. We see the appeal, but would be hesitant to get excited about it just yet.

BCE’s problems are not quick fixes

Growth has stalled in BCE’s legacy business, as cord-cutting continues and media shifts away from traditional channels (radio, TV, etc.) to modern ones. Combined with a mature regulatory backdrop, BCE is having trouble deploying capital effectively.

Such pressure on returns led to the largest restructuring initiative for the company over the last three decades, as it cut nearly 5,000 jobs (9% of its workforce), announced plans to sell nearly half of its regional radio footprint, and close >100 The Source locations.

But it isn’t just the legacy business under fire. Bell’s wireless business has faced headwinds from regulators and price competition in recent years too.

As the company has gotten less efficient with its capital, its leverage has risen to compensate, resulting in a downgrade from BBB+ to BBB from S&P Global in 2024.

In order to repair its balance sheet, the company announced multiple divestitures including the ~$1B sale of Northwestel and $4.7B sale of its 37.5% stake in MLSE.

Given the focus on debt reduction, investors were then left scratching their heads when BCE turned around and spent $5B to acquire Ziply Fiber, a leading fiber internet provider in the Pacific Northwest.

The kitchen sink could be next to go

In conjunction with its Ziply acquisition announcement, the company paused its dividend growth. At a near 13% yield today, it’s clear that the market expects a cut, though the company held firm on its flat dividend guidance with Q4 results.

In our view, there’s little choice but to cut here. Dividends eat most of the free cash flow BCE’s core business spits off today.

34% enrollment in BCE’s dividend reinvestment program (DRIP) can buy it some time in the near-term (dividends paid out in shares rather than cash), but with a low growth model and stretched balance sheet, its options to improve FCF generation are limited.

We think it could come in a “kitchen sink” moment if we get a shuffling of the board and leadership team in 2025. Such a change would be welcomed by investors in our view, and would provide the opportunity to reset the dividend.

Another item that could use resetting is BCE’s incentive structure, which focuses on aggregate instead of per share numbers, encouraging unsustainable practices to hit year-end targets.

Valuation isn’t “no-brainer” attractive

With the the sell off over the past two years, BCE looks cheap on a FCF yield to market cap basis - but replacing market cap with enterprise value to account for the increased debt load, today’s price isn’t as mouth watering.

Looking at EV/EBITDA multiples tells a similar story, where if BCE could get back to a ~7% ROIC like it had in 2022, it wouldn’t be a screaming buy in the context of global peer valuations.

Where it does look interesting is on a longer-term valuation of BCE’s dividend stream.

Running a dividend discount model with a return on equity of 12.5% (currently 14.9%), dividend growth rate of 5%, and a cost of equity of 9.5% would value that dividend stream at ~$45/sh.

That said, a DDM model is simplistic and filled with assumptions.

Until we’re further along in the transition and the main sources of uncertainty are removed (return prospects, acquisition integration, dividend policy, leadership team), we’d expect institutional capital to stay on the sidelines and shares to be range bound.