More Trouble for US Regional Banks and BCE Struggles

[00:00:00] Welcome back to the Canadian Investor Podcast. We're back for a Thursday episode, Earnings

[00:00:20] in News. It's me and Dan Kent. Dan, 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 US that just came out today as we're recording.

[00:01:42] So on Tuesday, we also will explore what'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.

[00:03:00] Shelter costs increase on a month over month basis,

[00:03:04] but did decline on a year over year basis. 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

[00:04:20] even amplify inflation here in Canada after the inflation data, so 62% now, so a jump of 39 to 62% that it 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 true inflation rate right now is 1.39% over a year.

[00:07:00] Now people may think, oh, that's really low.

[00:07:03] And keep in mind that true inflation when inflation So like transportation, for example, said that would be my assumption. But it's just interesting to look at the different metrics.

[00:08:23] And if true inflation is right, then we'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 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

[00:09:42] rental component because there is a lag effect and you're kind of locking in those rates or plus tax invest in you with this incredible offer visit TGAM. So that's the globe and mail TGAM.ca forward slash TCI for complete details of this offer for our listeners. So I think enough about the inflation data in the US. We'll move on here with

[00:11:00] what's going on with New York Community Bank. So have you been following that a little bit?

[00:12:03] So they had long duration for the most part treasury. So US government bonds that they purchased when they were yielding,

[00:12:07] you know, the coupon was 1.5% or so.

[00:12:11] And the death of the pandemic when rates were near zero.

[00:12:15] And what happened is that as rates started going up, the value,

[00:12:19] the underlying value of those assets started going down,

[00:12:23] which is fine if you hold them to maturity, because then you get your capital back 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

[00:13:43] of how big it is in terms of all the US banks, 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

[00:15:01] they're bigger than this. I'm not sure. No, that's a good 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 a 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

[00:16:22] talk about commercial real estate how it's struggling I've seen myself and I 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,

[00:17:40] have limited ability to raise rents

[00:17:42] while their debt payments have increased in recent years

[00:17:45] because of high interest rates.

[00:17:46] The higher rates have also put downward pressure realizing that, but if you gave a loan to value of 70% and then the value has dropped like 30 or 40% in value, then the bank is actually lower. 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

[00:19:03] or the owner won't 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

[00:20:20] in the business of managing real estate, and that bank because they're like, okay. I don't know where this game bank is gonna be I don't want the drama anymore. I'd rather to go to a JP Morgan or something like that I'm gonna 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 account

[00:21:44] So you could see some deposit fleeing even though they are they are insured assets had five times roughly the loan loss provision. 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, 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

[00:23:04] remember, like not even close to this. I think yeah 910X from the previous quarter and 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 yeah, it's to try and convey like confidence in the company because

[00:24:20] Don't forget they probably already 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 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.

[00:25:42] Yeah.

[00:25:43] Yeah.

[00:25:44] I mean, I'm more than happy to look on the sidelines here.

[00:25:46] I would not touch this.

[00:25:47] Yeah.

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[00:27:03] of this offer for our listeners.

[00:27:06] Now we'll move on with some telecom earnings. saved 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

[00:28:20] of its traditional phone and internet,

[00:28:22] faster, higher margin businesses, tech, healthcare,

[00:28:26] telehealth, things like that. 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 everybody was laid off. Which was like a crazy, crazy thing at the time. They blame regulatory policies, the economic environment and changes in

[00:29:42] technology that resulted in the cuts and staff, and they also warned against

[00:30:43] The investing side of things is a company announced a 3.1% increase to the dividend,

[00:30:44] which is one of the smallest dividend raises by BC

[00:30:47] in quite some time.

[00:30:48] I'm pretty sure this company typically raises,

[00:30:50] you know, five, 6%.

[00:30:52] So this is notable because BC is pretty much a bond proxy.

[00:30:56] If you're unaware of what that is,

[00:30:58] it's pretty much an equity that offers

[00:30:59] very predictable returns, relatively low volatility.

[00:31:03] They fluctuate in price much like bonds do.

[00:31:06] They're inversely relative to 2023.

[00:32:22] And even if the company hits its top end 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 cashflow growth.

[00:33:43] So a pretty bad quarter,

[00:33:45] and just coming off of its 2022 highs, 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

[00:35:03] profits EBIT and EBITDA are not actual, 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

[00:36:23] in five or ten years from now, whenever that would be, just because that would just be 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 like this quarter was a pretty going forward what kind of impact will companies like Starlink have on them, right? Yeah Because then it's making internet accessible at high speed everywhere as the price of those come down

[00:39:03] More people could potentially start switching impact BC's I guess it's part of their core business

[00:40:03] 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.

[00:40:06] Until they, they don't have a choice though.

[00:40:08] And that's, that's always, I guess, like you can only like shuffle the deck chairs.

[00:40:15] Is that what they call it?

[00:40:16] Like, yeah, it's a kind of company that will only cut it if essentially the

[00:40:21] writing's on the wall for like a year.

[00:40:23] Everyone knows it's going to cut it.

[00:40:25] They'll say no up until the very last minute. 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 a bit by 9.4% and net income by 17%. So the key thing here is a company surpassed free cashflow targets it set out in 2023 and

[00:41:44] issued free cashflow targets in 2024. 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

[00:43:01] because there was a big slowdown in tech spending.

[00:43:04] So Telus International,

[00:43:06] they operate things like customer service, contrast in quarters here, it kind of makes you a bit concerned about BCE and I get again I think you can turn it towards you know I get the more you know legacy assets you know how BCE is having to you know 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

[00:44:22] a bit harder than expected this morning, rates might not come down as fast as extra money they saved on the not sighing Shohei Otani so that boosted the guidance. Yeah exactly. They said that aside. Yeah they said that aside maybe as a loan loss provision I don't know but I can of course. And I have for those watching so the difference in total returns between TELUS, BCE, Rogers and the S&P 500 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

[00:47:00] and severe market downturn that without the dividends you'd be likely to just

[00:47:05] panic and sell and the dividend prevents but they actually found that for every dollar in Dividend that these companies paid out they lost a dollar 15 and share price. Okay. Yeah that would actually ended up becoming more Yeah, yeah, cuz you're taking essentially you don't cash or assets 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.

[00:49:41] Yeah.

[00:49:42] Yeah.

[00:49:43] And one of the reasonable counter arguments to it. I have to do the earnings report on it. I haven't dug into it quite yet. Okay, 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,

[00:51:01] or, you know, that's not news to anyone

[00:51:02] that the Canadian economy is slowing down.

[00:51:04] Even our good friend Tiff mentioned it

[00:51:07] as in this latest presser. 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

[00:52:21] that it's down 8% since 2020.

[00:52:24] Now management said that the results were good

[00:52:26] despite challenging market conditions for free. The results were somewhat weak for 2023. So I think all in all, definitely an interesting quarter for TFI. Yeah. It's, it's 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

[00:53:40] highs.

[00:53:41] So it's done that five or six times since the start of 2022, which is pretty crazy.

[00:53:46] I don't, I don't think they raised the dividend though.

[00:54:44] to eight per share and prior to that, it was 0.47 per share. It kind of varied by like a cent essentially before that, but yeah,

[00:54:49] it looks like they did increase it.

[00:54:51] So I, I read correctly.

[00:54:53] You made me doubt myself there, dad.

[00:54:55] They do report it that way.

[00:54:57] You'll see it like, cause we, the one reason I say that is we have so many

[00:55:01] people ask about the dividend.

[00:55:02] Yeah.

[00:55:03] Uh, that's fair.

[00:55:04] That's right.

[00:55:05] Yeah.

[00:55:05] They did race.

[00:55:06] I was wrong.

[00:55:07] It's all good.

[00:55:08] You know, happens to the best of us.

[00:56:00] Yes. Firmly disagree with that, but that's a discussion for another day.

[00:56:04] So stay tuned in the next couple of weeks.

[00:56:07] I'll be talking about those again.

[00:56:10] We try to do it as the earnings come out, but sometimes, you know, we get

[00:56:13] passionate about the topic, goes on a little longer, so we'll, we'll push that

[00:56:17] down for in the next week or two.

[00:56:20] Anything else you wanted to add before we sign off Dan?

[00:56:23] No, that's it.

[00:56:24] Well, thanks everyone for listening or to the podcast today or watching us.