The Canadian Investor - More Trouble for US Regional Banks and BCE Struggles

Episode Date: February 15, 2024

Join us in this episode as we delve into the latest economic developments, starting with a closer look at the unexpected rise in the US Consumer Price Index (CPI) and its potential impact on future Federal Reserve decisions. We explore the intricate details of New York Community Bank's challenges, especially concerning its exposure to rent-controlled real estate. We look at 2 of the Big 3 telecoms by starting with BCE's lackluster earnings report, shedding light on its dividend concerns and regulatory challenges. We then look at Telus’ performance and how it compares to BCE. Lastly, we examine TFI’s fourth-quarter results, navigating through the ups and downs of the logistics industry amid a slowing Canadian economy.  Tickers of stock discussed: BCE.TO, TFII.TO, T.TO, NYCB,  Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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I know. I'm not sure if i mentioned this but i had a buddy who booked a flight to anaheim like before they had tied the streak against vegas and he wanted to see the record and i pretty much said like you just cooked them like that's the ultimate jinx there booked the flight and then they lost he's like well did he end up going anyways or oh yeah they went and then they went to disneyland i think for a day and all of that so at least say but yeah yeah at least he made the most of it but uh yeah it's uh you know it's too bad and then obviously it's like in the thick of hockey season i think it's nice because uh you know the death of winter although uh it's been incredibly warm in ottawa for the

last like month almost yeah it's been crazy like it feels like spring but everyone's kind of on the lookout because we know it's a bit of a tease and then i'll start getting cold again yeah yeah yeah we had that one week where it was like minus 60 and then it's been pretty good since yeah i mean yeah i guess anything compared to minus 60 is good so yeah we have a lot on the slate today we have some cpi print in the u.s that just came out today as we're recording so on tuesday we also will explore what's going on with the new york community bank and all the drama regarding that and what's happening there some telecom earnings, some more Canadian

earnings. I think we might have too many segments on the slate. So if we're not able to get to all of them, we'll do them next week. So you want to get started with CPI in the US and the big lines behind that? Yeah. So CPI came in hotter than expected, which is why as of recording, the markets are down quite a bit. The TSX is down almost 2% because of this. The NASDAQ is like a percent and a half. And it was 3.1% versus 2.9% expected. And on a month over month basis, it came in at 0.3% when 0.2% was expected. And CoreCPI, which pretty much removes

the volatile, like the most volatile things such as food and energy came in at 3.9%, which was higher than the forecast at 3.7. So pretty much every sort of forecast was quite a bit above, like you're only talking like 20 basis points, but this is, it's still like quite a big jump when you're talking 3.1 versus 2.9. So that kind of has spooked the markets a bit. Shelter costs increase on a month over month basis, but did decline on a year over year basis. So they're still reporting some pretty significant inflation in that regard. It sits at 6%, but I believe last year it was 6.2%. Same with food inflation. It grew month over month, but year over year, it declined going from 2.7 to 2.6. the question or bringing into question the expected May cuts and whether or not they'll still happen. It was pretty interesting this morning. I was reading a lot of commentary from just different analysts and institutions on just overall, just in the, in Google news.

And a lot of them say that a single report like this is unlikely to change the feds plan to cut at minimum three times this year. And as I mentioned, the Canadian markets are off to a pretty bad start to the year, and this inflation print certainly doesn't help. In my opinion, Canada is in a bit more dire situation to cut rates, and the Fed or economy is a lot weaker. The housing market is in a much rougher situation. And if the Fed decides to hold on for longer and the Bank of Canada might be forced to cut, which would in turn drive the dollar down and could even amplify inflation here in Canada, in the simplest terms possible in regards to how it does push the dollar

down, when you have more attractive rates in other countries this tends to reduce foreign investment in canada which ultimately causes less demand for the canadian dollar it's obviously a lot more complex than that but that you know the most basic explanation possible this is why you could see pressure on the dollar and i guess i'll put it to you to talk about the trueflation because I don't really understand 100% how that functions. But yeah, no, that's great. It's a lot lower. Yeah, it's a lot lower.

And before I get to trueflation, so just to add to what you were saying, so that CME Fed watch tool that looks at the different probabilities that the market is placing on the different rates for the Fed in the upcoming meeting. So the next one being March, after that May, after that June. So from yesterday, the probability for the May meeting was that it'd be 40% or 39% at the same rate and 52% that it would be cut by 25 basis points. Jump in today after the inflation data. So 62% that it would be cut by 25 basis points. Jump in today after the inflation data. So 62% now, so a jump of 39 to 62% that it will stay the current rate. And now the probability for a cut

of 25 basis point is only 35%. And there was also a small probability of 50 basis points, but that's even smaller than it was yesterday. So it just goes to show how much the market is kind of hanging on to that data and reacts to this. Yeah. And they react to this. I think there's a lot of PTSD involved with the market seeing what the Fed did when the inflation wasn't going the right way or wasn't in the expectation, so higher than expected. We'll have to see. I think it's just one data point. So making any kind of assumptions regarding that, I think it's a little bit dangerous. But yeah, as you were saying, trufflation, it's a different measure. So they use a different basket than the official CPI data, which they claim the official CPI has not been updated the basket since I think 1999,

any major updates. So there are have been some small tweaks around the edges. But they say, look, things are way different than they were back then. And it's important that it reflects that they apparently gather data from a bunch of different areas, thousands of data points, probably tens of thousands. And their trueflation rate right now is 1.39% year over year. Now, people may think, oh, that's really low. And keep in mind that trueflation, when inflation was like 6%, 7%, 8%, trueflation for a lot of that time was actually higher than the official CPI data.

So it is something to keep in mind that, yes, it is lower now. I believe, based on what they're saying, that the data they get is a lot quicker and it's essentially updated like on a kind of minute to minute basis or at least on a daily basis, which is not the case for CPI. So they claim that their data is much more accurate. Their basket use is more accurate as well. So the basket that they use is 23% housing, 20% transportation, 15% food and non-alcoholic beverages, 8.5% health, household durables and daily use items, 7.2%. You have utilities at 5.9 recreation and culture

at 5.6 percent then you have clothing and footwear at 3.8 percent and then it just goes into the smaller baskets after that that have less impact but i think it's just interesting to look at that i i'm assuming they bake in i'm to assume that they bake in energy into the other baskets. So like transportation, for example, so that would be my assumption. But it's just interesting to look at the different metrics. And if true inflation is right, then we may be trending down in terms of inflation. It's just going to take some time for it to show up in the official CPI data. Yeah, it's pretty interesting to see it's so low when housing and food, which are, I mean, food's not too bad anymore, I guess. I think it's worse in Canada than it is the United

States. And probably housing is probably a little bit tamer in the United States as well. So maybe that's why it just seems to be at 1.39% when housing is almost a quarter of it. That's pretty interesting. Yeah. And I think the issue with housing, I've read a bit on that. And the logic is that housing can be a bit of a lagging indicator. So it's going to take time for housing if there's downward pressure on rents, for example, to show up or upwards pressure to show up. That's because leases tend to be multi-month, if not at least a year, right, for most people. So you have these prices that are locked in and the reflection, it won't be reflected into the inflation data until

they actually renew. Obviously, if there's some new leases being signed, that is captured a bit faster. Someone that's moving out of their parents parents basement to their own place, whatever it is, that's going to be captured as well. But there's always been some criticism regarding at least a rental component because there is a lag effect and you're kind of locking in those rates. So whether it's a downward pressure down the line or upwards pressure, you're not seeing it right away. Yeah, definitely. You definitely won't see it immediately. No, exactly. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free,

so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit Questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a

combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb,

but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. So I think enough about the inflation data in the US. We'll move on here with what's going on with New York Community Bank. So have you been following that a little bit? A little bit, not very much. I just looked over. I saw the loan losses yesterday and was like, wow, that is a massive, massive spike. So I kind of dug into it, but didn't have a ton of time, but just another regional bank situation in the United States, I guess. Yeah, exactly. So this one is, if people remember, there was in almost a year now,

I guess, a year ago. So 11 months ago, there started to be issues with regional was in the almost a year now i guess a year ago uh so 11 months ago there started to be issues with regional banks in the u.s silicon valley bank obviously there was silver gate before silicon valley bank silver gate was a bank that mostly catered around crypto companies they uh essentially did a voluntary wind up so that's why i didn't why it wasn't as publicized as Silicon Valley Bank. And then there was Signature Bank after that. So a lot of what happened with those banks was related to the type of assets that they had. So they had long duration for the most part, treasury, so US government bonds that they purchased when they were yielding, you know, the coupon was 1.5% or so and the death of the pandemic when rates were near zero.

And what happened is that as rates started going up, the value, the underlying value of those assets started going down, which is fine if you hold them to maturity because then you get your capital back plus the interest. However, if you do need to liquidate them because you need liquidity very rapidly and rates have gone up substantially, then the market will give you maybe 60, 70 cents on the dollar because the market can just go and buy some fresh, you know, bonds that are

yielding for four.5%. So they're going to buy it from you, but it's going to have to match whatever yield is in place. So that's why they took some major losses. And that was because they had a bank run. So they needed liquidity to be able to pay all those deposits that were fleeing. They took on some heavy losses and then essentially had to shut down because of that. That's a little bit of a recap. Anything to add before I continue on here? No, that summed it up pretty well. They bought a bunch of treasuries at like the lowest interest rates possible and just got hammered. Yeah, they needed cash.

Exactly. They did a poor job as managing interest rate risks. And this situation with New York Community Bank, which I'll say as NYCB, is a bit more credit risk. So it's a different kind of risk that's affecting that. I think there's some interest rate risks as well, but mostly credit risk. So it's hard to know the exact ranking of how big it is in terms of all the U.S. banks. I did some research. The most common figure I got, it was like between 30th and 40th bank, largest bank in the US. And it's one of roughly 40 banks that have over $100 billion in assets. And that $100 billion is important. It's not just a random number. It's

because when they meet that threshold, there are increased regulation that's following the Dodd-Frank Act and the great financial crisis in the US that we saw in 2008, 2009. And for context here, there are more than 4,000 banks in the US. So much different than Canada, where we love our banks to be massive and few and far between. And in their latest earning, they had 116 billion in assets. So, you know, not a small bank, but not a big bank. But for additional context here, if you take National Bank, which is the smallest of the big Canadian bank, they have around 430 billion in assets. So it just gives you an idea of like the size here, but also how massive, you know, how massive our big Canadian banks are.

Yeah. Like I would say they're probably, this is a complete guess, but they're probably more in line with like a Canadian Western bank, maybe, maybe like a Laurentian or maybe even they're bigger than this. I'm not sure. No, that's a good question. I can't, let me check here in terms of total assets for canadian western bank uh they're about yeah canadian western bank is much smaller so they have around 42 billion in assets so

definitely definitely smaller so i guess canada is a is a mix of a few small banks and then some massive ones and then some massive ones yeah that's it and there's no in between no exactly so a new you and nycb reached that 100 billion threshold when they bought a big part of the assets from the failing signature bank last spring that i just uh referenced when i was doing a recap at the time some were questioning whether it was a good idea for nycB to be buying those assets or not. They got loans as well as deposits. So loans, when you're a bank, a loan is actually an asset and the deposits are actually liabilities.

And that's important for people to remember because that's how banks work. Because the assets, I mean, the loans being the assets is because they're owed by other people. They also collect interest on them. So NYCB has significant exposure to the commercial real estate world, but more specifically multifamily. So this may come as a surprise for a lot of people because there's been a lot of talk about commercial real estate, how it's struggling. I've seen myself and I don't know about you. I've seen a lot of people saying commercial real estate, how it's struggling. I've seen myself, and I don't know about you, I've seen a lot of people saying commercial real estate, but talking almost like you can tell the way they're talking, they're solely talking about office real estate. Yeah, just the way. And

commercial real estate is a very big asset class. So some, and I think, yeah, and that's really important for people to remember because it's very broad. So you'll have data REITs, industrial, multifamily, office, malls, and there are some other categories. Not every single category is struggling. And even the categories that do have some assets that are struggling, in the US at least, it's sometimes very localized. So you'll have some office real estate that may be performing quite well in one market, but very poorly in another. So I think it's just important to take these things into account because I don't want to make a blanket statement when it's not really true. Now, the big issue with NYCB is that half of its loan are against properties that have

some kind of rent control in place. So rent control or rent stabilization. The issue here is that the owners of these buildings that have obviously loans against them, which are owned by NYCB, have limited ability to raise rents while their debt payments have increased in recent years because of high interest rates. The higher rates have also put downward pressure on the value of the assets because the higher the rates, I mean, the higher the costs would be to get a loan out, but also as the value has fallen

and the troubles that there has been with commercial real estate, banks are still willing, from what I've seen, to lend against those, but they will do so against for a smaller loan to value. So in the past, it may have been more 60, 70% loan to value, and now they may do more 50%. So that creates some additional pressure on the pricing of these properties. Now you can imagine that under these circumstances, you don't really want to be the bank that owns the loans backed by this real estate.

No. Especially if the value, the loan to value currently sits at 100% or potentially higher. Because people may have a hard time realizing that. and then the value has dropped like 30 or 40% in value, then the bank is actually, or the owner is underwater, has no equity in the actual building. And the bank is essentially on the hook for that property because there's a good chance they might have to take it back or the owner won't be able to repay the loan.

Yeah, and especially when you get to 100% or higher, that is going to put the bank in the hole as well, right? Whereas if you have a lower loan to value, the bank has a little bit of cushion room if they have to take over the asset and sell the asset. And that's why, I mean, it's a prime example of why they insure mortgages here in Canada with loan to values of 80% or more, just because they're a little bit higher risk. Yeah, exactly. There's not much leeway, right? If there's any kind of correction, any kind of downturn, then the bank can really get in trouble. And that's why that's what they're currently seeing in the US. And it's kind of a ripple effect, right? Because

even if the bank, you know, if the owners at some point, like these loans tend to be backed by the property. So the owners could just be like, OK, I'm defaulting on this. Here are the keys. You can take the property back. Well, if the loan is already underwater, the bank is already in a pretty bad spot. Sometimes it'll be hard, especially right now, to find some new buyers because interest rates are high. You require more equity to be able to put in. So you might find some buyers, but they might not more equity to be able to put in.

So you might find some buyers, but they might not be willing to pay the price you want. So it's just this ripple effect that kind of perfect storm, if you ask me. And of course, the banks are not in the business of managing real estate, and that's something they do not want to do. So that's an added layer. And the other risk here is the liquidity risk or because at this point, you know, there is some like if you're a depositor at NYCB, you're probably a little nervous. You saw what happened with the other regional banks. You're probably hoping that the FDIC, so the insurance company for loans or the insurance for loans similar to CDIC in Canada, that they will cover everything even if you have more than what they cover, which is $250,000 in the US. So that is another risk here if they have to get some liquidity pretty quickly because of a

potential bank run. The good news is that 72% of their deposits are insured by the FDIC, whereas it was around 10% for Silicon Valley Bank. The only issue here is that having a deposit insured doesn't mean that the client won't leave the bank. So I think a lot of people automatically think if it's insured, like no one will leave the bank. But people might still leave that bank because they're like, OK, I don't know where this bank is going to be. I don't want the drama anymore. I'd rather to go to a JP Morgan or something like that. I'm going to move all my money because I've seen what happens with regional bank. It's already a pain to move like business account, especially from bank to bank, but even personal accounts. So you could see some deposits fleeing, even though they are they are insured obviously it reduces the risk but it's still there and to make things worse moody's downgraded the

credit rating last week to junk following a fitch downgrade i believe that fitch downgrade got them to just the lowest echelon of investment grade which is also not great and that was following the bank's earnings release in which their loan loss provision skyrocketed from 62 million from the previous quarter to 552 million, which is, that is just massive for the size of his bank. Dan and I were talking about this before we recorded. So, you know, we talked about National Bank, more than $400 billion in assets. Well, the last quarter, they had loan loss provisions of $111, $114 around there. Well, this bank, which is about a quarter of the size in assets, had five times roughly the loan loss

provisions. So it does tell you that management is clearly seeing some trouble. You don't make a big jump like that if there's not a big reason for it. Oh, exactly. The one bank that is actually identical in size, I'm pretty sure would be Equitable. And their loan losses are nowhere near this. From what I can remember, like not even close to this. So I think Equitable is like $ like 115 billion or something like that. Okay.

So it's pretty similar. But yeah, the one thing about the insurance is that's like a great point. Like if you're at an institution and you're fearing this, like you're not just going to be like, oh, my deposits are insured. Like I would be getting my money out of there and going to a different bank. Yeah. If it was me. Yeah. Like, yeah, you just don't want to have to deal with the headache of that even being a possibility. be getting my money out of there and going to a different bank yeah if it was me yeah like yeah

you just don't want to have to deal with the headache of that even being a possibility so it makes it create like it probably less likely but i think i the the more i was reading that the more like people seem to make the assumption like oh well those loans are not going anywhere well that's not really true there's less it. It's less likely, yes, but it's still there. Yeah, definitely. I mean, it's a tricky situation. That's a huge bump in loan loss provisions, almost tenfold, really. Yeah, pretty much. I think, yeah, 9, 10x from the previous quarter.

It'll be interesting to keep an eye on it. I think I saw something that the CEO and management were buying shares. I mean, I don't know. I feel like oftentimes they just do that to show that, you know, it's to try and convey like confidence in the company because don't forget, they probably already have a lot of shares that have gone down in value. So maybe for them, it's more of trying to just build some confidence with the market saying like, oh, see, we're buying some shares. But I think you always have to remember, they have a lot at stake already on top of their, you know, their stock options or the shares they

already have their salary as well. So I mean, it's to me, I think that with a grain of salt, because we also saw it. I mean, there's a famous, I think that with a grain of salt, because we also saw it. I mean, there's a famous scene in the great in the big short where I think the Lehman Brothers CEOs like, oh, I'll be buying more. And literally the company goes bankrupt like the next day after that. So I think we have to take those with a grain of salt. Yeah. A lot of insider buying you have to take with a grain of salt.

I remember I think it was Algonquin, after they cut the dividend, like their management just started buying a ton of shares, I think. And it's down quite a bit since those buybacks. So yeah, insider buying is very, very, like you said, these guys have a lot of shares, so they're motivated to keep the share price high. So I mean, maybe they, like you said, they do this to boost confidence, buy a lot of shares so they're motivated to keep the share price high so i mean maybe they like you said they do this to boost confidence buy a ton of shares back people who might take the insider buying a little too seriously think that the company's undervalued when in reality this looks like pretty terrifying yeah yeah i mean i'm more than happy to look on

the sidelines here i would not touch this yeah 10 foot pole i mean maybe it all works out and it is like a discounted price but uh let somebody else exactly gamble i'll watch on the sidelines with my popcorn and let someone else make or lose money on it yeah so uh that's it and we'll keep everyone posted as there are more development there on NYCB and what happens. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's

customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network.

You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. That is Airbnb.ca forward slash host. Now we'll move on with some telecom earnings. So I'll hand that over to you. We have BCE and Telus here. Yeah, so there's a lot going on with BCE,

which is pretty weird because this is usually like a pretty low volatility kind of business as usual company, but they actually posted a pretty low volatility kind of business as usual company, but they actually posted a pretty bad quarter. I think they lost over 5% on the day of earnings, which for BCE, that's a pretty big drop. It's just based on a single report. So revenue and earnings were relatively in line with street estimates, but cashflow guidance was pretty weak. I'll talk about that in a bit. But the first main thing is the company laid off over 4,800 people in what it calls the largest workforce restructuring in 30 years. So the layoffs are 9% of total staff, and they'll save the company an estimated $250 million annualized. And if anybody has followed me for any length of time, you've probably heard me say before that I'd never really liked BC because of the legacy assets it holds,

like a lot of media, radio, things like that. And I own Telus instead due to the fact it's got a little more outside of its traditional phone and internet, you know, faster, higher margin businesses, tech, healthcare, telehealth, things like that. And I'm saying this because Bell of its traditional phone and internet you know faster higher margin businesses tech health care telehealth things like that and i'm saying this because bell came right out and said they're reducing spend on overly regulated and declining businesses so it sold off over 45 radio stations and it closed 107 the source stores and i didn't even know that bell owned really the source before i read this report oh yeah oh yeah i don't know if they're like a full owner or not but yeah i never even knew they owned the source which i mean i'm not surprised we still have one where i'm at but like it's just

so expensive and you know it can't really keep up with the other major retailers like say a best buy or something so i'm not really all that surprised and by the looks of it the radio stations look to be a bunch of local news type stations this isn't the first time the company has done this either in mid-2023 they got rid of a bunch of their sports radio stations and it was the same thing like it was just like surprise layoffs like nobody's seen it coming in the next day i think the one station in alberta they shut down was like a tsn 1260 which is in edmonton it's just the next day it was just done and you know everybody was laid off which was like a crazy crazy thing at the time they blame

regulatory policies the economic environment and changes in technology that resulted in the cuts in staff. And they also warned against additional cuts, not only to layoffs in terms of more staffing, but also in terms of additional capital expenditures. This is investing aside from a community standpoint. It's relatively sad. And I'm not really surprised how there isn't more regulation here restricting, like, all these major telecoms from having control over these, you know, smaller stations. And the government came out, I think it was specifically Trudeau, and they absolutely slammed BCE. They said, like, quote, unquote, we've seen over past years journalistic outlets radio stations small community newspapers they've been bought up by corporate entities who then lay off all the journalists so it's definitely not a good look for BCE from a PR standpoint but the other concerns back on the

investing side of things is a company announced a 3.1% increase to the dividend which is one of the smallest dividend raises by BC in quite some time. I'm pretty sure this company typically raises 5%, 6%. So this is notable because BC is pretty much a bond proxy. If you're unaware of what that is, it's pretty much an equity that offers very predictable returns, relatively low volatility. They fluctuate in price, much like bonds do. They're inversely related to interest rates. But the key with a bond proxy is it also has to grow its cash flows over time. So the concerns in regards to the smaller than usual dividend growth rate from BC

is there's pretty much no growth there. So you've had year over year inflation of, well, what do we say? 3 point, what what was it 3.1 percent and that's in the u.s but still like you're looking at a you know a three percent dividend raise so there's actually no increase in purchasing power here but it didn't just stop there the company also reported some pretty lackluster guidance when it comes to free cash flows this was arguably the most shocking thing on the quarter. So they reported 3.1 billion in free cash flows in 2023. So the company pays out around 3.5 billion in dividends. So, you know, there's a shortfall there.

A lot of this was expected. However, many telecoms were finishing up some, you know, large scale Capex, like 5G networks, fiber networks, all those types of things. And the assumption was that free cash flow would improve heading into 2024. However, they actually guided to lower free cash flows in 2024 relative to 2023. 2023. And even if the company hits its top end of free cashflow guidance, it'll be sitting on about a 20% shortfall, 20 to 25% shortfall of the dividend. And keep in mind, this is also with BCE cutting back spending by more than $500 million next year. So prior to 2022, you would have had to go back more than 20 years to find the last situation that BC did not have enough cashflow to cover the dividend. And unless they blow guidance out of the water,

2024 will mark the third straight year that it can't pay it with free cashflows. A lot of people are saying that BC will never cut the dividend, which is probably true, but the alternatives to keeping it alive are not really that beneficial to shareholders. I mean, you're looking at more layoffs. You're looking at cutting capital expenditures that might impact the company's growth. They could issue debt. They could issue shares. We do have to remember that yield does not equal return. So the maintenance of a dividend at the expense of shareholder value may be what a lot of investors think they want, but it might not be optimal. Finally, in addition to concerns over the dividend, the company's outlook was relatively poor. So flat to 4% revenue growth, a 2% to 7% decline in adjusted earnings growth,

and a 3% to 11% decline in free cash flow growth. So a pretty bad quarter. decline in free cash flow growth. So a pretty bad quarter and just coming off of its 2022 highs, it's now trailing the TSX 60 over the last one, three, five, seven, and 10 year timelines. So this is one of the largest blue chip companies in Canada. I think they're one of the largest companies in Canada period. And they've just had, they've had a rough go over the last few years. Yeah, definitely. And looking at it, I was pulling some stuff for joint TCI listeners, and I think this is a pretty worrying trend. So I have two data points here. So they're pretty similar, both of them. So I have EBITDA compared to their interest expense on an annual basis and EBIT

compared to the interest expense. And the coverage ratio has been steadily going down since 2016. So it's not just a recent thing. So it's been pretty steadily going down since 2016, peaking around 9.2 for EBITDA to interest expense and then around 5.9 for EBIT to interest expense. And now it's gone down respectively to 7.1 for EBITDA and 3.8 to EBIT. So that's a worrying sign. Just means they're paying more and more in interest as a percentage of essentially their profits. EBIT and EBITDA are not actual like net income, but it's a pretty common measure to be measuring in terms of interest coverage. Especially with a telecom like EBITDA is probably going to be the more accurate just because of

how much depreciation and amortization they have. But yeah, it's a weird situation for BCE right now. It's not, they need rates to come down, which this inflation print is not exactly the best for the rate environment moving forward. And they just like, they do own a lot of, like I said, kind of like legacy, like media assets that really, like they cost a lot of money and they really don't make a ton of money. So don't know it's gonna be interesting yeah question for you like

what's this obsession with some companies because yeah like it's it's obviously a bond essentially a bond like stock exactly and there seems to be this obsession with these kind of companies to keep their dividend up when sometimes it may just make more sense to rip the band-aid off reduce the dividend and it would give so much more leeway to the company i mean i don't know what the future holds but i think it's a non you know there's a decent probability in my view that they're just pushing out the inevitable dividend cut whether it's in five or ten years from now, whenever that would be, just because that would just be such an easy way to be able to get the company back, you know,

in order. Of course, if you need to do some layoffs to be a bit more efficient, I'm not saying that's great, but sometimes it's just a part of the course, like it is what it is. Of course, you want a company that's profitable. But I mean, I don't know, I see a part of the course like it is what it is of course you want a company that's profitable but i mean i don't know i i see a lot of warning flags because if they want to keep the dividend that high essentially they have if they don't want to cut it they have to either reduce their expenses which clearly they're trying to do with these layoffs they can get more debt which is not good because down the line it's going to start biting them in the rear end or they can issue more stock get some more equity in there but then that's an issue

because if you dilute have more shares if you want to keep the dividend at the same level you're going to be paying more dividend even if you keep it at the same level because there's a broad there's a higher number of shares out there. Yeah. And I think this quarter was a pretty big sign to a lot of people. Because like I said, BCE is not something that loses 5%, 6% in a single day. It's got a beta of 0.35%, I think. It doesn't move all that much in price. So to see it fall by that much is quite drastic. And like I said, the maintenance of the dividend is what some people might want. But overall, anything they have to do to maintain that dividend, if they don't have the cash

to pay it, is detrimental to you ultimately. You're not really going to benefit. You're going to get that 8% dividend. But're, you're not really going to benefit. You're, you're going to get that 8% dividend, but again, yield is not returned. So, I mean, who knows what's going to happen? They did like up until, like I said, up until 2022, they did a very good job of, of coverage in terms of the dividend. Like, like you said, though, it was tight. It's been tight forever. This company has paid out pretty much all its earnings as a dividend for, for a very long time, which I mean, it's such a mature business. It's not going to grow that much. So, I mean, it makes sense. Like you said, it's kind of a bond proxy, but like high interest rates have, have hit it, hit it pretty hard. Yeah. And they were,

they were thin even when, you know, they were thin in terms of dividend coverage even through the last decade when rates were just ultra low. Yeah, and you factor in too going forward, what kind of impact will companies like Starlink have on them, right? Because then it's making internet accessible at high speed everywhere. As the price of those come down, more people could potentially start switching. Impact, I guess it's part of their core business. Media is changing a whole lot. Obviously, this podcast is an example. The way that people consume media, you know, has changed over the years.

How well is that business going to do? I'll be honest. I would not touch any of the telecoms with a 10-foot pole. That's just me. There's just a lot of uncertainty. They're laden with debt. And I just, I don't know. I see a lot more downside than potential upside.

I'm not saying there's no potential upside. I'm just saying from my standpoint, there's just a whole lot of risks. And even with like a 7.8% dividend, I don't know. I see the probabilities on underperforming the market to be quite high. Yeah. And I think the underperformance is more so reflected and I don't think there's any chance

they would cut the dividend. I don't think they would, even if it results in, you know, like the things we talked about. I do not think they will cut the dividend, which will make a lot of people happy. Until they don't have a choice though and that's that's always i guess like you can only like shuffle the deck chairs is that what they call it like yeah it's a kind of company that will only cut it if essentially the writing's on the wall for like

a year everyone knows it's gonna cut it they'll say no up until the very last minute and just pull uh kind of a 180 but well that's what uh that's what real can did yeah during the during the pandemic they're like the dividend safe the dividend safe then they cut it well intel did the same thing but i digress i like to dunk on intel um let's talk about telus now the other tell yeah So Telus was a bit better. And there was almost like, I think on earnings day, Telus gained four or 5% while BCE was down four or five. So there was actually quite a big spread here. Full disclosure, I own a position in Telus. It's not very much. I think it's maybe 3% of my portfolio. I've held it for a very long time and it was a

very strong performer leading up to the pandemic. The best performing telecom by quite a wide margin. I've never really had any interest in the other two. Revenue came in line with street expectations. It posted a high single digit beat on earnings. The company posted its strongest fourth quarter ever when it comes to customer growth, and it eclipsed the 10 million mark in terms of mobile phone subscribers. So revenue grew by 9.4%, adjusted EBITDA by 9.4%, and net income by 17%. So the key thing here is the company surpassed free cashflow targets it set out in 2023 and issued free cash flow targets in 2024 that will result if they hit it of course in 28 to 30 percent growth year over year so the 2.3

billion in free cash flow it expects to generate in 2024 will be enough to cover the dividend i think they pay out around 2.1 billion billion a year, I believe. So from a dividend standpoint, a coverage standpoint, it's in a much better position than BCE. They expect their tech-based businesses, so that would be TELUS International, TELUS Agriculture, TELUS Health, to grow by anywhere by 2.4% in fiscal 2024. And it expects adjusted EBITDA to grow around 5 to 7.5 percent in these segments as well so TELUS typically has always had a growth multiple relative to the other telecoms like Rogers see Rogers BCE Quebecer uh Kojico I think is how you pronounce it this multiple

was pretty quickly erased when Telus International, one of its faster growing segments and one it spun out to not too long ago. I own it. I didn't buy it on IPO, but when it dipped in price, I added to it. It was the largest tech IPO in Canadian history, I believe. It took an absolute beating because there was a big slowdown in tech spending. So Telus International, they operate things like customer service, tech support, IT consulting, like application development, things like that. So when spending slowed, like the company just took a huge hit, I think they were guiding to like 15 to 20% revenue growth. And then they all of a sudden came out and pretty much said it'd be flat. So it was like a massive decline in guidance. So why is this apparent to Telus? Well,

Telus is a huge shareholder of Telus International. Still, it makes up, it's either a high single digit or low double digit percentage of Telus's EBITDA. So when that happened, Telus took a big, big hit uh the growth multiple is pretty much gone it's trading relatively in line with the other other telecoms maybe a bit more expensive but overall it was a pretty strong quarter i mean obviously bce could turn the ship around but when you see the stark contrast in quarters here it kind of makes you a bit concerned about bce and i get again i think you could turn it towards you know legacy assets, how BCE is having to divest some of these businesses because they're not making any money. Lower policy rates helps BCE, but it also helps Telus.

And again, just as I mentioned with the US CPI coming in a bit hotter than expected this morning, US CPI coming in a bit hotter than expected this morning. Rates might not come down as fast as expected. And just on a note, I've just felt it may be worth mentioning because of these two telecoms. Rogers had a pretty reasonable quarter as well. However, they're showing higher churn rates and they actually had a reduction in the average revenue per user. So they issued some pretty lofty guidance, but I would imagine this is primarily because of the Shaw acquisition. So they expect double-digit service revenue increases, 12% to 15% adjusted EBITDA,

and more than 30% growth in free cash flows. Who knows if they'll hit this guidance? Most of it would probably be, like I said, acquisition-based. But it's so much, there's a huge difference between bce's quarter and rogers and telus which is uh pretty obvious that bce is in a bit of trouble right now yeah maybe uh rogers it's uh just the extra money they saved on the not sighing shohei otani so that boosted the guidance they set that aside yeah they set that aside maybe as a loan loss provision i don't know but i i can of course um and i have for those watching so the difference in total returns between telus bce rogers and the s&p 500

in the last five years needless to say that uh they've trailed the S&P 500 by a lot. So total returns includes the dividend here. 98% for the S&P 500, 28% for TELUS, 20% for BC, and Rogers is essentially breaking even for the last five years. So it just goes to show, and I know there's some dividend investors, and I think maybe this is more of a PSA, is when you see there's certain Twitter accounts, I won't name names,

but they focus solely on the income that they get. And these are people that started investing 20, 25 years ago sometimes, so there's some pretty impressive amounts. But at the end of the day, if you're taking the same amount invested and put it in the S&P 500, you'd be way out front right now. And you could use that money and just buy whatever income they're getting and then some. So I think that's really important to remember is that total returns are really the main from a mathematical standpoint.

And from a psychological standpoint, that is the one thing where I can see that dividends can be good or dividend stocks or a portfolio of just dividend stocks. If you feel like having that will prevent you from making a mistake in the, you know, if there's a severe correction and severe market downturn, that without the dividends, you'd be likely to just panic and sell, and the dividend prevents you from not doing that, then I think there's a case to be made. And I've always been consistent on that. There's a case to be made that dividends might be optimal for that specific reason. But from a pure math standpoint, it doesn't math.

Yeah, it just doesn't. So that's actually an interesting point because I read this was probably late last year or early this year. But obviously, when a company pays a dividend, it comes off the balance sheet, it reduces the equity, the share price is going to drop. So regardless, I think a lot of people get confused because say a company goes ex-dividend and they're green on the day they might think that you know this doesn't impact it but it's still factored in it's just the other market factors are also factoring in so they did they did a study and i believe they took it was either the 20 top dividend paying companies on the s&p or the dow and they looked at what happened on the

ex-dividend date and they actually over i can't remember how or the Dow, and they looked at what happened on the ex-dividend date. And they actually over, I can't remember how long the study was, but they actually found that for every dollar in dividend that these companies paid out, they lost $1.15 in share price. Okay. Yeah. That would, I mean, that actually ended up becoming more. Yeah. Yeah. Cause you're taking essentially, you don't cash your assets, right? So you're taking, you're essentially taking those assets and you're giving it to shareholders. That's why it's included in your total returns. That is a reason.

You own those profits already. Yeah, exactly. You own them. I mean, obviously, it's including total returns because if you own especially those higher yield, oftentimes most of the return will be because of the dividend. But the problem is the total returns is still below the market in a lot of cases. And don't get me wrong, I have dividend stocks. I've talked about the companies I own. I do have some dividend stocks, not all of them. I think there are some really good companies that do a good balance of, you know, paying a growing

dividend, but also reinvesting in the business in a sustainable way. The one example that comes to mind, or the two are like the railways, right? Maybe not CP for growing the dividend, but nonetheless, or reinvesting in the business. So I think these are really good companies, good example, they have a very low payout ratio. So I think it's just not saying, you know, one or the other other but just understanding that you know total returns is really the thing to be looking at you know dividend whatever income you're getting as a dividend is again it doesn't really matter if in the grand scheme of things from an optimal standpoint at least from a math perspective yeah yeah and one of the reasonable counter arguments

to it that i have heard is the fact that you know when you leave money in the company you're obviously relying on the management to earn returns on that money and you know management they make mistakes all the time so some people would rather have the money you know distributed to them which is a completely valid point yeah but maybe look for a company with better management would be my counter argument. Exactly. Yeah. But again, that's a fair point.

So if you do get the cash, it's for you. There is some taxability there if you don't have it in a registered account. That's a bit of a downside as well. But I think we've talked enough about dividends. We have a few more segments. I don't think we'll get to all of them, but I'll put my best Braden hat here and talk about TFI International. Do you own that one? I can't remember. I did. I think I sold it at like 140 and then tried to get tricky and never

ended up buying it back. But we cover it quite a bit. I have to do the earnings report on it. I haven't dug into it quite yet. Okay, no, that's great. So it's not like, you know, super long here. So I'll focus on Q4 because I'm interested to see how they did, but especially with the Canadian economy slowing in Q4, I don't think I'm, you know, spoiling any, or, you know, that's not news to anyone

that the Canadian economy is slowing down. Even our good friend Tiff mentioned it is in in this latest presser now revenues were ever so slightly up to 1.97 billion compared to Q4 of last year the increase was primarily due to acquisition which was offset by reduced volumes and weaker demand logistics revenues were up by 28 however package and courier less than truckload and truckload revenues were all down for q4 and believe it or not that was actually a pretty solid quarter it might not sound like it but that's because if you compare to another company that's in the same space ups they reported a few weeks ago and they saw their sales decline by 7.8% in the quarter and announced layoffs at the same time now you know obviously TFI is definitely better than that even if you

factor in the acquisitions net income was down 14% to 131 million earnings per share was down 12% to $1.53 free cash flow was up 5% to $652 million for the full year. They increased their dividend by 14%. And for the full year, they bought back a $288 million worth of share, which is about half of what they did last year. The share count is pretty impressive that it's down 8% since 2020. Now, management said that the results were good despite challenging market conditions for freight. And management said that they continue to invest in the business despite weaker demand. So I think they're being very opportunistic here. I know Braden loves the business.

I know it decently well. I'm not your potentially more better versed than I am on the business, Dan. potentially more better versed than I am on the business, Dan. But overall, I think it's always interesting to see a management team that's reinvesting in the business when there's a bit of a downturn, because oftentimes that is the best time to invest in the business if you're able to do so. And I think it shows how solid their business is if they're able to do that when you have companies like UPS that are struggling. I haven't checked. I can't recall if FedEx has reported yet, but that's another one. I mean, the railways are also in that same kind of business line, a bit different, obviously,

but still it's moving freight. And they were also, you know, the results were somewhat weak for 2023. So I think all in all, definitely an interesting quarter for TFI. Yeah, its stock price has been pretty resilient, all things considered. I mean, over the last like two years, it's followed a pattern where it goes through a 20% decline, like a 20% correction, and then just touches all time highs. So it's done that five or six times since the start of 2022, which is pretty crazy. I don't think they raised the dividend though. So the one done that five or six times since the start of 2022, which is pretty crazy. I don't think they raised the dividend though.

So the one thing that TFI does, and it's actually like frustrating. I thought they did, yeah. So they talk about year over year dividend. Oh, okay, okay. So they raised it. I think they raised it a couple quarters ago, but every quarter they'll mention the dividends they paid out and they'll talk about the year over year growth of the dividend. But I might be wrong. They might have raised it, but I don't think it would be typical for them to raise it right now.

So they mostly talk about, yeah, you can look that up. I'm pretty sure they're going to talk about how it's 14% higher than last year. No, they did. They raised it. Yeah. Did they? Yeah. Yeah. So for the pay date of January 15th, so when people will hear this podcast. So yeah, it was 52.

0.528 per share. And prior to that, it was 0.47 per share. It kind of varied by like a cent essentially before that but uh yeah it looks like they they did increase it so i i read correctly you made me doubt myself they do report it that way you'll see it like because we the one reason i say that is we have so many people ask about the dividend yeah that, that's fair. That's right. Yeah, they did raise. I was wrong. It's all good. You know, happens to the best of us. We still had a couple of companies to talk about, but we're running a bit long here. So for next week or in the next couple of weeks,

probably as things start slowing down a little bit, especially on the Canadian front, there's two businesses that I want to talk about. First of all, is Cineplex. I think that's always an interesting name just to see how they're doing compared to, you know, pre-pandemic, pandemic, how things are trending, and then Affirma Holding. So the buy now, pay later firm. As I was digging through their earnings, I found some really interesting data that I will be very excited to share with our listeners just in terms of trends that they're seeing that are, I don't know, not necessarily good for society in general, but I guess they try to frame it as they're helping people. Let's just say that I firmly disagree with that, but that's a discussion for another day. So stay tuned in the next couple weeks uh i'll be talking about those again uh we try to do it as the earnings come out but sometimes

you know we get passionate about the topic goes on a little longer so we'll we'll push that down for uh in the next week or two anything else you wanted to add before we sign off dan no that's it well thanks everyone for listening or to the podcast today or watching us if you're on join TCI. If you're interested, all the videos are there. We share some charts too. So whenever I'm talking about, you know, charts, I'm using finchat.io, but also sometimes some information directly from the companies. So make sure you have a look there. We appreciate the support. And make sure you leave us a review on Apple Podcasts or Spotify. It helps other people find us. You can also check out Dan and his team's great work at stocktrades.ca.

And you can find Dan and I both on Twitter. Dan sometimes going at it with dividend investors, although he likes dividend nonetheless. He's just not only into dividends. Yeah, I primarily use that platform for entertainment now. It's pretty, it's pretty entertaining. I do it with a lot of people. But yeah, it's X has gone downhill quite a bit. Yeah, it's I'm still on there. The odd time.

Yeah, yeah. Okay. The odd time. That's right. Anyways, it's I'm still on there the odd time. Yeah, yeah. Okay. The odd time. Anyways, we'll leave it on that. Thanks again for listening, everyone. And we'll see you next week. Next Thursday. Yep. See it. The Canadian investor podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Braden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.