It seems Bell Canada Enterprises (BCE) is getting a taste for serving up a surprise announcement on Friday morning just before the stock goes “ex” dividend.
BCE executive management this morning announced the dividend would be 7.7% higher for 2011, with a 3.5 cent hike in the quarterly rate to 49 1/4 cents, equating to a $1.97 rate and a 5.69% yield on yesterday’s close of $35.07.
We’ve seen this preemptive move from the "new" post-aborted privatization BCE before. On Friday, September 10, BCE made a splashy announcement with the acquisition of CTVglobemedia (CTVg), upstaging the prior day's Quebecor (QBCRF.PK) Videotron division wireless service debut.
This isn’t the stodgy old Ma Bell your rich aunt bought in the past. She’s now hip and fast and run by a team of sharp financial engineers with a keen eye for what Canadian yield investors want.
But did they increase the value of the company with today’s dividend and adjusted EPS boost? Not by much from my viewpoint.
BCE CEO George Cope presided over an 8 a.m. analyst conference call to discuss how making a prepayment of C$750 million on the pension plan deficit would pay for the dividend increase.
The dividend increase and boost in adjusted EPS for 2010 and 2011 by 3 cents each is admirable. But as Siim Vanaselja, CFO, said in response to an analyst question, “none of the other financial metrics of the company have changed."
Some financial value was created today, because BCE “arbitraged” its low cost of funding (3.6% on the five year debs issued just recently) by using the cash to reduce tax payable for 2010 with the $750 million pension pre-payment. Future pension payments on the $1.6 billion deficit will drop to $400 million per annum from 2011-2014.
I estimate at a 12 times multiple, the boost to 2010 and 2011 EPS worth 6 cents in total to add 72 cents to the stock price. Discounted to today's dollars, about 60 cents.
BCE stock had been trading between $34.94-$35.44 over the past week. Therefore, I would expect the stock price to rise to $35.54-$35.94 based on the pension pre-payment.
The effect of the dividend hike is to increase the yield by 40 basis points to 5.69%.
On the call, the CEO reaffirmed the company's 65-75% targeted dividend to adjusted earnings payout range, and indicated the new rate of $1.97 would come in at the "low" end of the range in 2011.
This implies they expect 2011 EPS to be about $3.03 versus $2.80-85 in 2010. At $36 the stock is trading at about 12 times earnings and EPS growth would come in at 7.3%.
Because the stock is imminently going "ex" at a 45.75 cent dividend, you have to back out the payment to get the true yield it is trading at. At $35.07, the stock was yielding 5.29%.
Offsetting the dividend increase news was the company cancelling the share buyback for 2011. In 2010 the company had bought back 16.2 million shares at $30.80 on average.
However, the Q2 2011 expected closing of the CTVg acquisition will require issuance of $750 million in new BCE shares to Woodbridge, the senior partner in The Globe and Mail.
If you expect the stock to trade back up to a 5.30% yield on the higher 2011 dividend, that equates to an ex-dividend stock price of $37.16 and $37.63 cum dividend today, substantially higher than the estimate based on the EPS improvement.
We won’t get BCE’s firm expectations for 2011 EPS and free cash flow per share until they announce their Q4 and 2010 year end earnings on February 10, 2011.
The way I see it, today’s moves were all about financial engineering, and nothing to indicate BCE’s business is getting any better, competition is getting any lesser, or the company is any closer to delivering on its five strategic objectives, which includes Improving customer service.
Accelerating wireless, leveraging wireline momentum, achieving a competitive cost structure and investing in broadband networks and services round out the others.
Let’s look at improving customer service, and I can speak from experience it isn't happening. (I’m a loyal Bell TV, Internet and wireless user, mainly due to inertia).
I got a call a couple of weeks ago from some guy with a thick accent trying to talk about “Solar." In fact, we get a call from BCE at least once of month. Because we are a customer, the CRTC's “no-call list” prohibition doesn’t apply and we are fair game to get hit with marketing pitches.
After a few minutes of deciphering what the guy was trying to say, I determined it was not about solar panels, but about getting a free cell phone.
It was from Bell’s “Solo” division, its discount wireless service offering.
I listened patiently as I was interested in doing some field work on how BCE is fighting discount wireless competition from Roger's (RCI) chatr service, Wind Mobile, Videotron and Mobilicity.
As I listened, I gathered the sales pitch was a free Samsung phone if I signed up for a $30 plan. But it wasn’t clear from the representative how I would get out of my existing contracts (we also use Virgin Mobile and Bell Mobility) so as to take advantage of the discount rate he was offering. So we let the conversation lapse and I thanked the salesperson for the effort. Turns out he was being trained at a Manitoba call center.
I checked out the phone that was being discussed.
I got another call from Bell Solo an hour later (this time from Vancouver), giving me the same pitch on the phone. So I agreed to accept delivery of the new Samsung phone (five to seven business days with a customer assist number to help me cancel my existing contracts).
If this wasn’t enough time spent on a new phone, I got a call the following day to start the discussion anew. I told the person – who now was calling me “Mr. Chris” that I was much too busy to spend more time and was expecting my new wireless device as previously agreed.
Two weeks later, I’m still waiting for the phone to arrive.
I could go on about how I got the run around trying to fix a glitch in my Bell “hi speed” Internet service by forgetting about using its offshore call center and just flagging down a local Bell techie here in Barrie.
Bell needs to understand that cutting costs by substituting trained personnel with commodity call centers yields a frustrated customer just aching to call the competition.
BCE stock will probably get through $36 today and the higher dividend yield should support the stock price on an “ex-dividend” basis Monday.
Analysts will be raising their targets on BCE over the next couple of days. Some have already put out a note on the stock (although I haven’t seen them).
Target prices before today’s announcement ranged from $32 (Credit Suisse) to $37.00 (UBS) and $37.25 (Desjardins). Most big bank analysts had BCE at market perform with targets ranging from $34 to $36.
TELUS (TU) declined about $1 on the ex-dividend date on Tuesday and the “A” shares are now trading at $43.75, off from the December 3 high of $45.90. Therefore they have declined $1.50 over and above the 52.5 cent dividend. It’s a hold now. TELUS is relaxing its restrictions on number portability and early contract termination (BCE executives take note).
Recommendation to traders in BCE: reduce your position in BCE at current prices ($35.94) and if it trades above $36.25 today sell the rest. Buy it back on weakness after the holidays.
Prices are shown in Canadian dollars.