BCE Inc. shares have risen more than 12 per cent in the last month, moving in the inverse direction of crumbling global markets and giving investors who turned to the defensive telecommunications sector a rare victory.
Bell’s stock was performing poorly earlier in the year during a raging bull market, having reached its 52-week peak of $59.79 on Jan. 2. After more than nine months of decline, Bell’s stock closed at $50.95 on Oct. 31 but has since enjoyed a renaissance as share prices began a slow, yet consistent, month-long double-digit ascent towards $57.32 on Wednesday. In comparison, the S&P TSX Index grew one per cent during the period.
The telecom company was initially boosted by a solid third-quarter earnings report that was released on Nov. 1, analysts said, which was driven by increased wireline — TV, Internet and landline telephones — and wireless revenue. That gave the stock momentum, but investors hedging their bets and moving into defensive sectors propelled the stock further, Desjardins Group analyst Maher Yaghi said.
“If there’s a recession, there are services you can’t go on without,” Yaghi said. “Their pricing is not going to deteriorate because there’s a recession. Some clients might downgrade their services, but you’re still going to need your cellphone.”
Because the services they provide — namely, Internet and cellphone networks — are considered essential, telecom stocks are seen as safer bets in times of slowing economies and volatile markets, Yaghi said, and will offer investors less downside than just about any other sector.
While Bell’s stock has seen the most growth since the end of October, Rogers Communications Inc.’s shares grew five per cent in that time period. Telus, meanwhile, is up more than six per cent.
Telecom stocks have also been boosted by the decline of long-term interest rates because they’re dividend-focused. There’s a 70 per cent correlation, Yaghi said, between the performance of the sector and the 10-year bond rate in Canada.
Yields for the 10-year bond in Canada declined to 2.13 per cent on Wednesday from a high of 2.59 on Oct. 5, coinciding with the rise of Bell’s stock.
“When rates go higher, you start to require a higher yield from dividend stocks and inversely when rates go down, you’re more content on getting that dividend,” Yaghi said. “So you’re willing to pay more for the stock.”
The telecom sector also tends to perform well when long-term interest rates are down because companies such as Bell use a lot of debt financing to fund investment cycles, Yaghi said. When interest rates are down, it costs them less to maintain and refinance their debt.
This strong connection to long-term rates allows Bell to insulate itself from how the wider markets are performing. On Tuesday, when North American markets cratered after U.S. President Donald Trump called himself the “Tariff Man” and stoked fears of a trade war with China, Bell closed 0.5 per cent up.
As long as long-term rates stay low, Bell’s stock may be able to sustain its growth on the back of a new federal government policy, Macquarie analyst Sanford Lee said.
In late November, finance minister Bill Morneau announced the Accelerated Investment Initiative, which essentially lowers corporate tax paid by companies in the telecommunications sector, among others.
In a note published on Nov. 29, the National Bank of Canada estimated that the measure will provide Bell with a $100 million benefit in 2019 and a $200 million benefit every year between 2020 and 2023.
“What the government is trying to do is say ‘let’s reduce cash taxes then hope these companies reinvest it’… into stimulating the economy even further,” Lee said. “(The new policy) gives them more support and maybe they can keep this dividend growth growing, at least in the short-term.”
Although the rapid growth over the last month may have tempted investors to flip the stock for profit, Lee isn’t convinced that investors will head for the exit. Investors, especially institutional ones, hold on to BCE for dividend increases. And as the Bank of Canada struck a dovish tone on Wednesday and held interest rates, there’s more reason to believe Bell’s performance can be sustained.
“If you’re not raising rates and pausing it, you’re indicating that the economy can’t handle another interest rate hike, so that’s more support for defence, right?” he said.