Volatile Markets and Trouble at BCE and Starbucks

[00:00:00] Welcome back to the Canadian Investor Podcast. I'm here with Dan Kent. We are back for our regular Thursday recording. We're doing this one a little bit in advance just because of technical requirements for audio editing and so on. So we're recording this on Friday, August 2nd.

[00:00:33] So a little bit in advance but I think it's a really good day, Dan, to start recording because there's a lot of stuff happening. We're right in the middle of earnings season. The Fed just had its FYMC meeting on Wednesday.

[00:00:47] We had the jobs number in the US and the markets are imploding. So how's it going? Pretty good. Yeah, I spent a week or nine days away from it all. They were doing pretty mediocre and then come back and they're absolutely bombing today.

[00:01:03] NASDAQ is down 3% as we're filming this. A lot of pretty key earnings reports like big tech reporting, not so good earnings, a few chip companies reporting ugly earnings. And yeah, it hasn't been a good three weeks for the NASDAQ at all.

[00:01:25] No, it's been pretty rough and I cannot believe that you've fully disconnected. I feel like you were still keeping an eye on the markets a little bit while you were on vacation. A little bit, yeah.

[00:01:35] A little bit because I had a really good month of July for my portfolio. So I was checking in but I was trying to tune it out. Yeah, that's good. That's good. Well, we'll get started.

[00:01:47] So speaking of volatility, so it's been really volatile and when we were talking about volatility, we're just not talking specifically to the markets going down. Literally, there's been some days where the shift in the S&P 500 or NASDAQ or whichever

[00:02:04] index you're looking at, within a day it's like a 2-3% variance. It's pretty crazy. It'll be up 1.5% and finish the day down 1.5%. It's just been a bit crazy and especially with the FOMC meeting, the Fed on Wednesday,

[00:02:23] the markets were up and then the last couple of days, so yesterday and today it's been the other way around. So for the Mag-7, Apple is the only stock that is up over the last month and it's essentially breaking even.

[00:02:38] So that's pretty notable and most of the downturn has happened like you said in the last two weeks. It's pretty remarkable looking at that because these are the stocks that were literally leading the market and for the Joint TCI viewers, I'm sharing here what they've done

[00:02:55] over the past month. So Apple is up barely a percent and then every single other stock. So you have here Nvidia, Google, Amazon, Meta, Microsoft and Tesla. So they're all down in the past month.

[00:03:11] If you zoom out a little more, it's a bit of a different picture, bit of a different situation. I completely understand that and they're still performing well when you look over for the year to date.

[00:03:24] And I decided to compare the QQQ which is the NASDAQ, SPY which is the S&P 500 and XIU which is the TSX 60. So these are all ETFs that would track those indices. And it's pretty remarkable to look at what has happened year to date.

[00:03:42] So you had at some point this year, so on July 9th actually the TSX 60 was at 6% for the year in terms of total return. The S&P 500 was at 18% and the NASDAQ was at 24% and then you compare that to

[00:04:00] today and it's not quite a dead heat but it's very close. So you have the SPY that is actually outperforming now the NASDAQ or QQQ. So the SPY is at 15.62%. You have QQQ at 14.51% and you have XIU which is the TSX 60 that's at 11.41%.

[00:04:24] So the gap has really shortened in the span of about 10 days or so. So just remarkable what's been happening in the market and there's a good argument to be made that it could be a bit of a rotation into more kind of value stocks

[00:04:39] because let's be honest, the TSX is probably more value stocks when you consider that it's heavy in financials, energy and those kind of materials of course. Yeah I would imagine like the material end of things is what is causing...

[00:04:57] Well I mean financials haven't done too bad in Canada either but like gold is doing quite well. A lot of gold stocks on the TSX are doing quite well so the gap is certainly closing. And yeah the TSX contains a lot more like real economy type stocks, utilities,

[00:05:14] industrials, things like that whereas the NASDAQ is mostly all those tech options. Yeah if you look to the year, a lot of those tech options aren't necessarily doing that bad but no matter how long term your outlook is, it's shocking all

[00:05:30] the time to see you know the NASDAQ has given up. I think it's nearly 11% now since like the start of July and even like even this morning so the index, it bottomed out the NASDAQ was down 2.59% and then

[00:05:45] you know within 15 minutes it jumped up to down 1.6% and then over the next hour it dropped all the way down to down three and a half. And this is in like the first hour of the market opening. Like that is crazy.

[00:05:59] Yeah strap on your seatbelt and enjoy the ride huh? So no it's just amazing and obviously now putting things into more context. If you zoom out even more year to date and you pick the Mag 7, clearly they're still doing very well.

[00:06:14] The only one that's down is actually just Tesla that has been underperforming pretty severely since the beginning of the year. NVIDIA is up like 116%. So if you've held NVIDIA since the beginning of the year I do not feel bad for you. You've done quite well.

[00:06:29] You're still doing well. But it's just to bring some context as to like there has been a lot more volatility in the past month and like you said gold has been doing quite well.

[00:06:42] So gold over the last month is actually up 4% and what that kind of tells me is there is probably a bit of a move to safety here especially if investors are starting to get a bit more concerned with debt levels of government.

[00:06:55] So you're thinking about the US with their massive debt. I think it's beyond 30 trillion if I remember correctly. Now they're paying close to 3.5% interest on the debt compared to as a percentage of GDP. So that's pretty massive in Canada we're a bit better at around 1.8%.

[00:07:14] But just to keep that in mind that it could be investors kind of shifting from typically going to US longer term treasuries to potentially allocated at least part of that to gold. Not quite sure but it's something to keep an eye on and I've been pretty

[00:07:30] vocal about myself allocating part of my portfolio to gold. It's still not a huge part but it's about 3.5% now so it's starting to build up a little bit. And obviously Bitcoin has been doing pretty well over the last month in

[00:07:44] part with Donald Trump who's been kind of made an about face over the last I wouldn't say the last month but earlier this year he spoke at the Bitcoin conference last week as well. So Bitcoin I think has been rallying a little bit on that and people

[00:07:58] betting that the odds of him potentially becoming president again so it could be bullish for Bitcoin. I think there is a big kind of political aspect and people trying to do like an air quote Trump trade when it comes to Bitcoin.

[00:08:11] So we'll have to see but it's been interesting to look because Bitcoin has been definitely like not super correlated in the last month with the Nasdaq and stocks and I would say even more so like even if you look back at

[00:08:24] the last six months it's not been as correlated as it had been in the previous year or two before that. No it kind of had its big drawdown before all of this didn't it lose like 20% over the course of a month.

[00:08:38] But now it's kind of stabilized a bit. I mean I think Trump knows exactly what he's doing by appealing on the cryptocurrency end of things. I mean just the way he's talking about just the way he like speaks on it is I don't know.

[00:08:51] I find it kind of funny. Call it nobody. Yeah. You say like nobody will take your bitcoins or something like that. I remember one. Yeah and he said he would support self custody so yeah I mean he's

[00:09:02] definitely been either did some homework on it or has been trained because I did listen to his speech when at the Bitcoin conference because I was just curious as to what he would say and clearly has done a bit of work and whatever people think about him.

[00:09:17] I mean he's pretty good at identifying issues that may be helpful for him from a political basis. So that's why I personally take all of this with a big grain of salt because after all he's a politician. Exactly.

[00:09:31] And I'm very let's just say I'm very reluctant to trust any politician whoever it is. So that's just my personal view typically. But in the US what's happening is that there's a lot of people that are in the

[00:09:46] crypto space that their main issue and the issue they'll be voting on is the party that's the most favorable to the crypto and Bitcoin space. So it's just a reality. I think that's just a lot of people are single voter or single issue voters.

[00:10:03] Having said that let's move on here to the big macro and feel free to interject Dan. I don't know. Did you watch the Powell press conference? No I haven't really had time since I since I got home and stuff.

[00:10:16] I just had the earnings recaps and yeah it's been a pretty busy time for me. I didn't have time to listen to it. OK no that's fair. I mean it's a bit of the same I would say but again the earlier so a

[00:10:29] couple days ago I don't think I'm bringing this like breaking news or anything. So the Fed's fund rate remained unchanged. Powell indicated that they are more focused on economic growth or lack thereof of the and or lack thereof and job numbers.

[00:10:47] And during the press conference he mentioned that the labor market is still in process of ongoing normalization but that the unemployment rate is still low at 4.1 percent. And I'll touch back on that when I talk about the jobs numbers that were

[00:11:01] just released this morning because spoiler alert the unemployment rate went up. And a quick refresher here the unemployment rate is a very flawed metric so that's because to be counted as unemployed you have to be actively looking for work.

[00:11:17] So if you're not employed but you've essentially become discouraged because you can't find a job and you've decided to stop looking then you're no longer counting that 4.1 percent. So it's something always to take days with a grain of salt because

[00:11:31] it's not a true reflection I would say of the actual unemployment but that's the metrics that they use. It's what we use in Canada as well. And he said that a rate cut would be on the table in September but that

[00:11:47] they would still be data dependent and the press conference really felt like a shift from them being more focused on the employment data now versus inflation whereas before inflation seems to be the primary focus was to get inflation in check.

[00:12:02] But as always he left the door open to no rate cuts if the data doesn't support it although it's clear that they are already leaning towards a rate cut here and I think now with the fact that the payroll data

[00:12:17] was not great that was just released this morning so it was weaker than expected with 114,000 jobs created. Unemployment increased to 4.3 percent so he actually said the 4.1 percent during the press conference on multiple occasions. So the fact that it's already creeping up to 4.3 percent that's

[00:12:35] definitely something in the wrong direction and that would probably support a rate cut in September. Healthcare jobs led the way with 64,000 new jobs while IT related jobs saw a decline of 20,000 and over the last year people who are

[00:12:51] employed part time because they could only find part time work has gone up 18 percent so that's a pretty big shift. So on a year basis these are people that would probably be more than happy to get a full time job but they just can't find one and the

[00:13:08] average weekly earnings has essentially been flat since May which might be a sign of wage growth slowing. So those are all things to keep in mind and then Dan I'll let you kind of chime in as well what are your thoughts on all of that

[00:13:22] but I'll just show the fed CME fed watch tool so I'll refresh here because I had it loaded a bit earlier this morning. It's probably going to be changing a little bit here. So I'm looking at it. Yeah. So it's actually changed pretty significantly.

[00:13:39] So I had it this morning when I looked at a 62.5 percent probability of a 50 basis point rate cut in September meeting and a 37.5 percent chance of a 25 basis points rate cut. And now as I just refresh it's at 73.5 percent of a 50 basis

[00:14:03] point rate cut and 26.5 percent of a 25 basis point rate cut. So the markets are pricing in some aggressive rate cuts in the September meeting. So what are your thoughts on that Dan? That's kind of what I was thinking, too.

[00:14:19] And I saw this first because I read an article this morning but that had mentioned that it was like 35 percent chance. But I didn't notice like that it had bumped up to 62 and a half.

[00:14:30] But I mean, it makes sense because there is clearly a lot of weakness here in regards to the one thing I'll say in regards to that unemployment rate. It does like it's mostly based on the participation rate,

[00:14:41] which is relatively low, like I was looking at a chart of it. And it's pretty much the lowest it's been since like the 1970s. The participation rate, like it doesn't fluctuate by very much. Maybe like two or three.

[00:14:54] As in like in the 60s, like I don't have it to 62.7 percent. Yeah, there you go. And besides, like the drop during the covid pandemic, if you actually trend this back, like it hasn't been this low in quite some time.

[00:15:10] So I believe the US unemployment is still a lot better than Canada's. I can't remember what Canada's isn't it in the sevens for Canada? I think it's I thought it was in the six, but yeah, it could be could be seven. You could be right. Yeah.

[00:15:24] Yeah, I mean, it's it's interesting to see like if they do cut by 50 basis points. So one thing I've been paying attention to is bonds and they're actually up quite a bit over the last while.

[00:15:35] I mean, if you look at something like Zag, which is like the BMO aggregate bond ETF, it's actually up. What is it? Nine percent over the last year. And bonds have just been getting absolutely thrashed the last while.

[00:15:48] So obviously rate cuts are I didn't get a chance to look up like a US government bond or corporate bond, but they're they're doing quite well. Obviously, you know, people are betting on continued rate cuts. And I wouldn't be surprised if

[00:16:04] the US got a little bit more aggressive, but I didn't think it was this odds. Sixty three percent. I didn't think it was that high. Yes. So the in terms of bond yields right now, you're looking at the five year bond for the government of Canada.

[00:16:20] So, yeah, it's basically at its lowest point has been in the last five years. So for those are refinancing your five year mortgages in the next little bit. Congratulations, you'll probably get a slightly less of an increase, but probably still an increase, myself included,

[00:16:36] if this can continue until the spring of next year. And then if you're looking here at the I'll just pull up the 10 year US bond, because that's usually what people focus on a little bit more. I know it's been down. So, oh, wow, it's actually below four percent.

[00:16:55] I'd been for it had been well above four percent for over a year now. Yeah, it's the first time. Yeah, first time it dips below four percent since I think there was a short dip in late in November of last year below four percent.

[00:17:14] But since then, it's the first time it dips before below four percent. Yeah. Yeah. And I mean, for borrowers like I my mortgage isn't renewing for like another 15 months, but I do pay attention to mortgage rates for quite a while. And I actually saw a few days ago

[00:17:27] there was one for four point three percent a five year fixed, which is one of the lowest ones I've seen in quite a while. It's actually lower than what I have now, which is good because I would expect cuts to continue to come.

[00:17:41] Yeah. But again, it's it's always tricky, right? With bond yields, because it's not it won't they won't go down as rates go down as like the central banks are cutting rates. I think a lot of people have to remember that.

[00:17:54] Yes, they will likely go down, but oftentimes they'll go down before rates actually start getting cut because the market is pricing that in. And then there's always a wild card of markets starting to get worried that governments are too indebted and then are actually starting to require higher

[00:18:13] yield on the longer term debt to compensate for that. So I think people have to take, you know, a step back and just realize it's an actual possibility of this happening. I'm not saying it will. But if markets actually start saying, look, we're worried about the US,

[00:18:30] its ability to pay its debt, or even if we buy US bonds or Canadian bonds, we're worried that it's not going to even keep up with the inflation rate, the yield that we're getting, then the bond prices will go down

[00:18:44] so that the yields actually go up and that the bond market starts finding those more attractive. So I think people just have to keep that in mind. The bond market, the central banks just don't really have that much control over the longer end of the curve.

[00:19:00] I think that's just the moral of the story. Yeah. Yeah. And I mean, on the on the mortgage end of things, that's you've mentioned it before, like just because rates go down doesn't mean fixed mortgages will come down.

[00:19:10] I mean, it's like it's immediate relief to variable rate holders. And I think there's quite a few of them like fixed rate mortgages are like, I think 70 plus percent of most banks mortgage books. But there's still a lot of variable holders who are getting some relief right now.

[00:19:25] But yeah, it's it's going to be interesting to see what they do in the next few months. 50 basis points would be very interesting. Yeah. Yeah. And then like I guess the last thing I'll mention before we move on to Amazon's earnings here is the political aspect of it.

[00:19:40] So again, Trump has been pretty vocal saying that, you know, the Fed should be careful, you know, cutting before the election, essentially implying that. So it is the whole political aspect is something that I find pretty fascinating. And I think to me is

[00:19:58] I can like I've always been reluctant saying that they would start cutting in September because the perception of them not being independent, if they do so at this point with the data coming out, maybe it's easier to justify.

[00:20:12] But again, doing a 50 basis point cut, I think that might be a bit much. So I think the 25 may make a bit more sense because he can clearly say, look, we highlight we cut because, you know, job numbers are trending the wrong way. The economy is slowing.

[00:20:27] Inflation has actually kind of slowed down. The pace of inflation has slowed down so they can justify that. But the 50 basis points, even despite the market pricing in about 75 percent chance for 50, I don't know. I am very skeptical that they would go that far.

[00:20:43] But maybe I've been wrong before. I'm sure I'll be proven wrong again for other things. So we'll see in September. Yeah, I mean, the numbers certainly justify it. I mean, especially when we get to Amazon earnings, like even their reporting,

[00:20:57] you know, consumers are are scaling back, not spending as much. I mean, jobs not in a good not in a good state, unemployment rising. I mean, I wouldn't be surprised. They're supposed to be independent. I think like a 50 basis point cut maybe looks a little bit off.

[00:21:11] But I mean, what you could say is probably like what are the odds of them keeping rates next meeting, which is probably it's got to be, according. It's got to be next to zero. Well, according to the same CME at FedWatch, they're like giving it zero probably. Yeah.

[00:21:29] Yeah. So so we'll see. But we'll move on to Amazon. So you said that, yeah, consumers seem to be scaling back a little bit. Yeah. And we had mentioned that Amazon is the worst performing Mag 7 over that over that stretch period. It's down like 20 percent.

[00:21:44] But it's really not all that surprising because Amazon out of those companies is going to have the most exposure to, you know, the consumer just because they're, you know, at its core. It's it's a retail company mixed quarter for Amazon.

[00:21:57] So earnings per share came in a dollar twenty six. This was well ahead of estimates. They expected around a dollar six. But revenue came in at just under one hundred and forty eight billion, which missed expectations by about eight hundred million. I don't really think these headline numbers

[00:22:12] or why the stock is facing a ton of pressure. I think it can be, you know, partially attributed to the fact that some of its, you know, main growth verticals, that being Amazon Web Services and its advertising segment kind of posted

[00:22:24] lukewarm results relative to expectations like they're still both growing at a pretty crazy pace. But I think that the market just kind of expected more, especially, you know, with a ton of these stocks being near all time highs.

[00:22:37] Amazon Web Services revenue came in at twenty six point three billion. I think twenty six billion was expected and its advertising segment came in at twelve point eight billion versus expectations of 13. So as I had mentioned year over year, AWS

[00:22:54] and its advertising segments reported 19 and 20 percent growth respectively. While the retail end of the business grew five percent, this has kind of been the situation for Amazon for for quite some time. And it's it's pretty impressive for Amazon like AWS and advertising.

[00:23:10] But like, I don't know if there's maybe a perception that they're not really keeping up to, you know, the cloud based growth of, say, a Google or a Microsoft and then the, you know, just ad based growth of a company like Metta.

[00:23:20] I think Metta reported revenue increases of 22 percent year over year. So maybe that's, you know, partially attributing to the fact that the company is, you know, it's down 12 or 13 percent just because of this earnings report. So they stated themselves that they fell short on their revenue estimates

[00:23:39] and they attributed most of it to lower ASP's or average selling prices. So they pretty much said that they're seeing a notable shift of buyers trying to select the cheapest product that suits their needs rather than, you know, ordering more expensive ones.

[00:23:54] And they had mentioned on the conference call that they are continuing to see this type of pressure on ASP's even in the third quarter. The one thing I'll say is like I I thought I had told Amazon

[00:24:06] to stop sharing my data because I'm constantly looking for the cheapest. Yeah, I don't know if this is like a shift. I typically always do that. I've never really. I'm not going to. But it can. You know, funny story can backfire.

[00:24:19] I bought like two baseball hats, like kind of just basic hats. I like to call them dad hats and they were cheap and I will they were like disintegrating. But I wore them a couple of times. So, yeah, I can't really return them.

[00:24:35] So I guess be careful buying stuff that's too inexpensive. Yeah, I mean, what is the idea here? Like normally people would search stuff and maybe just buy the first thing available, whereas now they're scrolling to the second or third page, trying to find like cheaper knockoff options.

[00:24:53] I think they have a bit of competition from I can't remember the name of it now, but it's like a Chinese company that sells like ridiculously cheap stuff. Tmoo. Yeah, something. Yeah, Tmoo. Yeah. Yeah.

[00:25:05] But my wife has ordered a few things off Tmoo and they are like it's it's the quality. Yeah, like extra cheap is what I'll say. Yeah. In terms of guidance, the company stated that revenue was likely to land somewhere in the hundred and fifty four

[00:25:18] to one hundred and fifty eight billion range and operating income to land somewhere between eleven point five and fifteen billion dollars. So this would represent eight to 11 percent growth on the revenue side of things, which is pretty typical. Like their guidance is typically in this range.

[00:25:32] It has been for quite a while. But on the operating income end of things, like on the bottom end of guidance, that would just mean flat operating income year over year. And I mean, I'm not really sure why the company is so deep in the red

[00:25:46] based on this this earnings report. I mean, it's I mean, it could be just a market thing as well today. I think to me, like when I when you were saying that, I was thinking about it.

[00:25:56] I think it's a combination of, you know, things on the retail side, probably slowing a little bit and then just the overall market sell off right now. I think it's probably just a combination. If it was a normalish day where the market is either flat slightly up,

[00:26:14] I would probably be like kind of mid to low single digits down, I would think. That's kind of what I was thinking, too. Like if the Nasdaq was flat on the day, it's not down. Although it's recovered a bit, but at its lowest,

[00:26:25] it was down like 13 percent on the day. If the Nasdaq is flat, it's probably down like five or four. Maybe. But I mean, the core of the business is still growing very well. Amazon Web Services is still growing well. Advertising segments still growing well.

[00:26:40] I mean, you got double digit growth there. And guidance came in a bit short of what analysts were expecting. But it really wasn't a massive margin. I guess full disclosure, I own Amazon. I added I added quite a bit,

[00:26:52] quite a big chunk this morning to it on the drop. We'll see how it plays out over the long term. But I think a lot of it, you know, is probably fears because they definitely mentioned their conference call was really short.

[00:27:05] I had a read of it. It was relatively short. But they do mention numerous times, like not that they're worried about the consumer, but that they're noticing the consumer slowing down. So, I mean, I guess a lot of people might fear that, you know, it's going to continue.

[00:27:19] It's going to get worse. And they also mentioned this is this is weird to me, but I guess it makes sense in a way. They mentioned that Q3 estimates are going to be fairly hard to predict because of a couple notable events that have happened.

[00:27:31] So the Trump assassination attempt and the Olympics in particular. And they said like they've noticed a shift consumers can't like on events like this, they typically shift away from purchases and more towards like news events, which is OK. It's it's a bit I don't know.

[00:27:46] I guess I could see it. But I don't know how like the Trump if I'm going to buy something on Amazon, I don't know how the Trump assassination causes me to not buy it. Yeah. I don't know. And if I'm sitting on the couch watching the Olympics,

[00:27:59] I'm probably sitting on my phone. The first. Yeah. Oh, man, this the whole assassination attempt. I mean, it had like some pretty big impacts, at least short terms on the can't remember where the betting odds where they're coming from

[00:28:14] for who may win as next president of the US. I know like it really spiked up because I think a lot of people were betting on kind of the undecided sympathy vote, potentially going to Trump because of the assassination attempt.

[00:28:28] But I never thought about, you know, people shifting their purchases because of that. Yeah. Yeah. But they like as soon as I read that, I was like, wow, that seems so odd. But I mean, clearly they're like they said it did. This wasn't just like speculation.

[00:28:42] They said they noticed the change, a shift in purchases over these two events. But another additional thing, which probably caused a bit of the volatility as well as they did say, they're going to be spending a lot more money building out AWS and AI infrastructure

[00:28:57] and that capital expenditures will come in higher moving forward. But overall, I think it was a pretty solid quarter. I think, you know, a double digit dip is is a bit extreme. But I guess people are just worried about, you know,

[00:29:12] the state of the consumer and, you know, if it's going to get any worse. Yeah. OK. No, that's a good overview. I don't have too much. Why don't we do BC? Yeah. And then we'll do Starbucks. And if we have time, we'll chat a little bit about Intel

[00:29:28] and why it's down the gutter right now. So I'll do BC just because obviously I know it's a very widely held name for a lot of our listeners here. And we've been fairly critical about BC.

[00:29:41] So I figure it was a good idea to look at it from an earnings perspective. Revenues were down one percent to six billion. Total services subscribers were up by three point four percent to twenty one point eight million. So definitely good on that end.

[00:29:55] And I suspect obviously this is in large part due to population growth that we've seen over the last couple of years in Canada. They even mentioned that in terms of their future growth, population growth was a big part of the potential tailwind for them on the conference call.

[00:30:11] The difference, obviously, between the two, so the revenues being down and the total services subscribers being up. I mean, it's pretty obvious that there are having some price pressures. I mean, you would not see a discrepancy if they weren't having between the two.

[00:30:27] So clearly that is an issue for them. And they mentioned that during the call that they have had some sustained pricing pressures. And they specifically said that it was a challenge with mobile plans pricing during the call and operating costs wore down three

[00:30:42] percent to three point three billion, and they are focusing at getting costs down. Net earnings were up 52 percent to six hundred and four million, while EPS was up 60 percent to 59 cents per share. Free cash flow was up 10 percent to one point one billion.

[00:30:59] The main reason for free cash flow to be so significantly is that there was a big drop in capital expenditure, which was three hundred twenty million lower than last year. So that will have a big impact. But I don't know about your opinion on that, Dan, but

[00:31:15] I know they've been saying they wanted to lower cap pegs, but as someone looking at B.C., I'm just I'm a little bit worried because that can be done on a short term basis until, you know, short, medium term, maybe.

[00:31:29] But at some point that will start catching up to you if you, you know, you don't invest enough in your network as a whole. Yeah, ultimately, like these telecom companies, they're very capital intensive. And ultimately, if you're having to

[00:31:44] cut Capex in order to, you know, in this situation, for the most part, continue to maintain the dividend, it eventually it's going to catch up to you in terms of, you know, top line growth, which is inevitably going to catch up

[00:31:57] to you in terms of earnings growth overall. I mean, a lot of them were very capex heavy during the pandemic, especially when money was pretty much free. And so all of them are going to be scaling down quite a bit. But most of the telecoms like Telus,

[00:32:16] Quebec or Cogeco, like they're scaling down to the point where, you know, the dividend is affordable, whereas B.C. is kind of playing catch up to the point where they're scaling down just to afford it. And they're still even though the

[00:32:30] free cash flow was pretty good this quarter, they still guided. They're maintaining their guidance for a potential 11% drop year over year in free cash flow, which which ultimately isn't that good. And I mean, just in terms of the growth, like there's not

[00:32:46] very many avenues for growth for these telecoms right now outside of just population growth because they're ARP like the average revenue per user. Like that's been flat to declining for a very long time. I mean, I know multiple people who pretty much just call

[00:33:03] all the three telecoms until they can get the best price and they go with that one. Like the pricing pressure is insane. I negotiated with my provider. So when my term came up the two years, because I had like

[00:33:15] a financing plan for the phone, I basically called them. I'm like, OK, well, I'm paying. I think I was paying sixty five dollars. I'm like, you're going to have to do better than that. If not, I'm going to go to a competitor and they're like,

[00:33:27] well, you know, we can increase your data for the same price. I'm like, look, I've got 25 gigs. I don't even use it all in a month. So if you can't do a better price, then screw that.

[00:33:37] So they came back and they're like they gave me a loyalty discount and they got it down to 50 bucks and increase my data from 25 to 100 gigs with that. So, yeah, if you push back and you threaten, especially if you have your own your phone, obviously

[00:33:53] you need to own your phone. You can get some really good deals and, yeah, be able to get better pricing or switch and you'll be able to keep your phone number. Well, yeah. And I think that's another element of it, too, is like

[00:34:05] for a very long time, people would just they resigned to get the new phone. Right. Whereas now it's like people are not doing that. Like phone people are holding onto phones longer. And once you get out of that, you know, contract,

[00:34:19] you have a ton of flexibility, like bring your own device. I mean, they're they're pretty much at your mercy, because, like I said, I've known numerous people who've you know, they're with with Bell. They'll call Telus. Telus will give them a better price.

[00:34:32] They'll call Rogers. Rogers will give them a better price than Telus. And then they go back to B.C.E. And it's just the competition is it's it's pretty stiff right now. But yeah, it's it's pretty tough to imagine like outside of population

[00:34:44] growth, how they can how they can continue to grow. And I know I know Canada is didn't they set a cap on temporary residents like they're for the first time? And I haven't been keeping an eye on that all that much.

[00:34:58] But I think I think they have, but I think it's still above their target. Yeah. If I remember correctly, I mean, I could be wrong, but I should. I had an interview with Rich Diaz, a rich Diaz that came out last Thursday. And definitely it's something for him.

[00:35:13] He's been very critical of because the poor planning with the immigration and you know how immigration is important. And we need to have, you know, fairly high level of immigration if we want the economy to keep growing and, you know, to continue going forward.

[00:35:30] But we have to also make sure it's sustainable. And I think we'll have to see where it goes from here. But I know he was pretty critical on the federal government for that.

[00:35:39] And to get back to B.C.E. here, you are talking about the free cash flow and the payout ratio for the quarter. And again, looking at free cash flow for a given quarter, it's going to be pretty volatile.

[00:35:51] So typically you want to look at a bit more like on a yearly basis. But just for context, the payout ratio was 85 percent compared to 88 percent during the same quarter last year. So a little bit of an improvement here.

[00:36:03] But keep in mind that the dividend has not been covered when you look at the first half of 2024. So they're still paying more than they have in free cash flow. And the interest expense is still a big problem for B.C.E.

[00:36:19] So the interest expand compared to last year was up 19 percent to 426 million, and it's just been going up and up. I posted something on just on X earlier this morning as I was doing my notes for B.C.E. And I mean, the trend is not good.

[00:36:35] And I just I cannot understand why they are not looking at just cutting the dividend. The amount of money they could save by cutting the dividend by half or even a bit more than half. Still yield about three to four percent.

[00:36:51] So they would still be able to, you know, pay a decent dividend, even if they cut it by more than half. It just baffled my minds. I mean, they're they're on pace right now to pay roughly, I would say, like probably one point three,

[00:37:06] one point two, one point three billion in interest for the year, which is a whole lot of money. And it keeps increasing because you also you have debt that is coming due that needs to be refinanced. So they now have six point six billion of their

[00:37:21] thirty eight billion in debt or so that they will have to refinance within the next 12 months and to provide more context here, because I've had people pushing back saying, well, you know, interest rates are going down. And I don't think people fully understand how the refinancing will work

[00:37:37] and what the rates they're currently paying. So during the quarter, they issued new debt at a rate of 500. Sorry, at a rate of five point one five percent and five point six percent. They stated that they also have two nodes. So that that is maturing in early 2025,

[00:37:56] a 600 million dollar note that is currently yielding to point. Well, that is has an interest rate of two point seven five percent and another one point five billion node that is currently at three point three five percent.

[00:38:09] So I wanted to say that because, you know, we get a lot of flak, you and I for being really bearish on B.C. But let's be honest, those two nodes will be refinanced probably in the five range or at least high four.

[00:38:24] So it's going to be a pretty significant increase in interest on those two nodes. And they still have more debt coming due later in 2025. So this is just prior to March of 2025. So, yes, even if rates continue going down, they will need to refinance at higher rates.

[00:38:42] And that's why I've been saying, like cutting the dividend to me is a no brainer from a business perspective. I mean, if you use two billion that you're currently paying in dividend, you're not even cutting the full dividend. You're cutting a bit more than half.

[00:38:55] You take that two billion and you pay down the debt and see your debt is on average, let's just say on average it's like four percent. Right. Let's just be conservative. It's four percent. That savings about 80 million a year by doing that.

[00:39:09] So if you do that for a few years or even five years, you can get your interest expense down pretty significantly. Your debt levels are on a much more sustained level. And then you can look at growth opportunities

[00:39:24] to make the business grow forward and potentially grow your dividend as well. But on a more sustainable basis. But people are just so focused on that dividend. And it's just it's a stupid decision. I'll just say it. It's a very stupid decision from a business perspective.

[00:39:38] It's dumb. It's completely stupid. It really puts them in a difficult situation and they have no margin for error. And that's the big issue here. Yeah, there is like there is almost no margin for error. I think when they reiterated guidance, it pretty much

[00:39:55] I think when I calculated a while ago, it was about a one billion dollar shortfall in terms of the dividend. So, I mean, even if you could, you know, cut it to the point and like full disclosure, I don't think they will cut it. I think they should.

[00:40:08] I don't think they will because they're not smart. Yeah, stupid. I don't think. Sorry, but I'm getting. And they like, yeah, again, I don't think they will cut it. I think they should cut it, but I do not think the dividend will be cut.

[00:40:23] I mean, you might get into a situation where, you know, next year, if they can't, you know, boost that free cash flow, they might have to seriously consider it. But yeah, it's I'm not exactly sure why they don't just,

[00:40:36] you know, scale it down a bit to the point where, you know, it's the dividend is affordable because ultimately, like, I think they're just scared. They're scared that too many investors will decide to leave the stock

[00:40:48] and sell the company because they cut the dividend by the end of the day. You know, I will, you know, maybe I'll be proven wrong. But I think that probably if they were to cut the dividend, the there's a much higher probability of B.C.

[00:41:05] achieving higher toll returns over the next five to 10 years than if they tried to keep the dividend at this level because it's not sustainable. Just think about like an extra 80 million in compounds, right? That you're saving every single year.

[00:41:21] If you just cut the dividend, you don't need to like suspend it all together. Just cut it. You still have a nice three, four percent dividend. I just to me, it's a no brainer. I mean, you know, Dan, yeah, you're wrong.

[00:41:33] You you own your business, you run your business. I, you know, Braden and I, too. We like we have the business business. Braden has a couple. And to me, from a business perspective, is just a no brainer.

[00:41:44] But anyways, well, yeah, I mean, I'll stop because going on around as a as a shareholder, it is it deteriorates value for them to continually have to come up with money to pay that dividend. Like it's ultimately not good over the long run if they can't, you know,

[00:42:02] and maybe they get things together in 2025 and it's well covered. But I mean, at what expense? Like how much are you going to cut those capital expenditures? How much do you need rates to come down? Because most of their debt is even if we see more declines,

[00:42:17] it is probably going to come in, you know, at a higher level like than than what their what its finance set now. And I mean, you look at you look at other a lot of people get so fixated on these high yield blue chip dividend stocks

[00:42:32] and about how cutting the dividend would be the death of the company. But you look at 3M, they cut the dividend. They're up like 45 percent since they cut it after like continual underperformance for years. Intel, I mean, that's a completely different story because.

[00:42:48] Yeah, let's let's talk about Intel. We might as well. So Intel, when they first cut their dividend, you would think, oh, my God, you know, it's it's it's devastating. They cut the dividend. Nobody's going to want to buy this thing. It went up 65 percent post dividend cut.

[00:43:02] And then it of course got, you know, this is more operationally. It got obliterated, obliterated. That's like that's a completely separate situation. And again, Intel, I've been pretty critical. I think they waited too long to cut it. I mean, the writing was on the wall for several years

[00:43:18] that they should have cut it so they could reinvest in the business. And clearly you're talking about Intel different, obviously, than a Bell. We're in. Bell is more it's not as cutting edge, I would say, where Intel, you know, they're competing against the NVIDIAs of this world,

[00:43:33] even the TSMC because they have their own foundries as well. Intel competing at the NCMD. And obviously, it's it's an industry that constantly like it's moving very fast. So the R&D, the investments that you need to put in are quite high.

[00:43:50] So to me, obvious like it was also a a no brainer. But now they came out with their earnings and it was pretty bad. We didn't do notes on this. So we're just going to talk about it a little bit off the cuff

[00:44:02] just based on what we kind of read quickly. So you want to go over Intel a little bit? Yeah. So they had first off, they outright suspended the dividend. Effective Q4. Yeah, Q4. So what are they'll pay out?

[00:44:15] They'll pay one more quarter and then they just outright getting rid of it. And I can't remember how much they cut last year, but they it was a big cut. Yeah, it was pretty big. And now they completely suspended it.

[00:44:28] And a lot of people might think, you know, it's down. Well, I think it's down like 28 percent now. And a lot of people might associate that suspension with, you know, the fact that it's down so much. And I think this is it's more so along the lines,

[00:44:41] the financial health of the company that's causing the concern and the fact that we the like 50. They are issuing the largest layoff out of any workforce since 2020 or something. I read they're laying off 15 percent of their staff. They reduce their they came in well below expectations

[00:45:00] and they reduce their guidance. They said they're going to go through the largest restructuring in over 40 years for the company. So, I mean, a lot of people, you know, they might think that the dividend suspension might have caused this big dip.

[00:45:12] But I mean, it's there's a lot more problems that came out in that quarter. That is the reason for the 28 percent drop. And it's not the it's not the dividend suspension. I mean, the dividend is being suspended because the company

[00:45:25] will probably not be able to afford it, which is more, you know, of an indicator of the price drop than than the suspension itself. Yeah. Well, as you said, that's I pulled off layoffs. That's why. So really good useful tool for those wanting to kind of track layoffs

[00:45:43] in the U.S. for tech. And yeah, 15000, it's 15 percent of the workforce. The one that comes the closest is Tesla earlier this year that did 14000. And then Google late or early 2023 was at 12000. But definitely some significant layoffs are Intel.

[00:46:04] Yeah, it's I would say the quarter was a disaster. I mean, they expectations were about 10 cents per share earnings and they only posted two cents. So it's it's a pretty big, pretty big dip for Intel.

[00:46:20] And I think what is their their dividend is 12 and a half cents a quarter. For one more quarter than they're they're axing it completely. But yeah, it's I believe they hit a 12 year low or something like that. Like they it's nasty for Intel.

[00:46:41] Yeah, lowest price since December 20, 2012 or 2012. So you're talking a 15, 14 year low for the company. And I mean, it did take that huge spike in 2023 due to the AI boom. But there from what I read quickly in the in the conference call

[00:47:00] and just overall articles about it is there, you know, they're kind of they said, you know, that area of growth is not as big as they expected. And they're planning to soft the top of my head. I believe they're the cuts that they're making 20 billion this year,

[00:47:17] 17 and a half billion in 2025. And then I don't think they outright stated a number in 2026, but there's still going to be, you know, operational operational cuts. Yeah, and they're going to be saving about five hundred and thirty million per quarter.

[00:47:31] So let's say about two billion a year, roughly for the dividend by suspending it. And then that's compared to before they had actually just the first while the cut they did about a year and a half ago.

[00:47:44] So they used to pay, wow, six billion a year for that dividend. And now it went down to two billion a year. And then obviously once they're suspending it zero, we'll see how long it suspended. I have a feeling they probably will not restart it anytime soon

[00:48:00] because they'll have to focus on getting more profitable and just reinvest, reinvest and reinvest. Yeah. Yeah. I mean, if you look at a free cash flow chart for Intel, it is ugly. Like they generated in. So this would be trailing 12 month cash flow.

[00:48:16] So at the end of the quarter, March 2020, they had 20 billion in free cash flow. And now they haven't been free cash flow positive since like early 2022 trailing 12 month free cash flows right now and then they've powered negative 12.3 billion.

[00:48:31] So I mean, it's yeah, that's that's the perfect example of a company that is a top dog and then kind of sits on its laurels, stops innovating or invades probably not in the right space and then gets its lunch sheet in essentially for the joint TCI listeners.

[00:48:50] You'll see it's a pretty staggering thing. Twenty twenty, twenty, twenty one. I'm going to go on a limb that they were doing well because everyone their brother and sister was buying a PC because of, you know, the pandemic and having to zoom and all that stuff.

[00:49:06] And then once that demand kind of waned, which almost perfectly perfectly lines up with their, you know, them going free cash flow negative, they started being in trouble. So they weren't able to identify that the boom was going to be short term

[00:49:22] and that they had some pretty big issues coming up. And now they're paying for it. Yeah. And if you look to like a buyback, like a shares outstanding chart, like it used to buy back a lot of shares. So from 2014 to 2020, 2021, it bought back over just over 20 percent.

[00:49:40] I'm doing this just like off the top of my head. It might be a little less than 20, but now like you can tell once, you know, once it went sour from a profitability standpoint, they've now increased their share count by about five percent

[00:49:53] over the last couple of years. So, yeah, it's it's not a good situation for Intel. I mean, 30 percent is well, it's down 26 now. It's recovered a bit. But that's pretty big. That's a big dip. Yeah, it's a big dip.

[00:50:08] So do you want to finish this with Starbucks and then we'll wrap it up? Yeah. So I do find Starbucks to be, you know, a pretty interesting company to go over in this type of environment. It's one that I own and I've just continually added to on weakness,

[00:50:23] as I do think it will be temporary. But they're they're struggling quite a bit right now. Revenue of nine point one billion missed estimates. Earnings per share of 93 cents came right in line. Overall sales are down one percent and same store sales declined three percent.

[00:50:39] Traffic to its U.S. stores continues to decline. It's down six percent. And for for a while there, Starbucks, you know, they were maintaining traffic, but their average ticket price was declining. Like people were just kind of opting out of the really expensive drinks

[00:50:54] and, you know, getting cheaper stuff. But now they're actually I think this is a second straight quarter where just overall traffic has started to decline. And the company attributes, you know, most of the drop to customers purchasing from grocery stores and making it themselves.

[00:51:08] But I do believe, you know, there's a bit of maybe competitive element here that they don't want to mention. And that is, you know, we've seen it with restaurant brands international. They own Tim Hortons like their Tim Hortons segment is absolutely ripping right now.

[00:51:21] And I think it's just because, you know, you can go to Starbucks and pay six bucks for a coffee or you can go to Tim's and pay, you know, a dollar eighty. So it's yeah, tastes like crap. The caffeine content is high.

[00:51:32] Exactly. I get a Tim Hortons coffee once in a while. So don't ask me. I mean, I do find it doesn't taste that great, but it has a bit of a how would I put that? That's not a nurturing feeling, but a nostalgic feeling for me,

[00:51:45] because that's what I started to get hooked on when I was at Ottawa. You when I was 19, 20. Yeah, I used to drink Tim Hortons coffee. I think I drank it every single day for like three, four years. But I don't really I don't really go there anymore.

[00:51:59] It's it's gone down and in quality. But obviously right now people don't care about quality because. I'll argue with you that it's never like never been great. Yeah, but it's cheap. I mean, it is cheap. And I think that's the point, right? Yeah.

[00:52:15] You've seen it with Amazon, right? People are they're going to cheaper products, maybe not as high a quality, but it gets the job done. And, you know, a coffee, I mean, regardless of how good it is, they probably they do the same thing.

[00:52:27] They give you most people their caffeine fix for a cheaper price. And I mean, yeah, speaking of competition, it is really struggling in China. Same store sales fell 14 percent and overall. Yeah, it was it was it was pretty pretty ugly. Overall transactions and average ticket price fell.

[00:52:48] China is an excellent growth market for the company, but is also the most competitive by far. I think China has a ton of smaller, cheaper coffee, you know, avenues for many, many consumers. And in addition to this, Chinese consumers, as I've mentioned

[00:53:03] numerous times, they're a lot stingier than North American ones when it comes to spending and saving. So I think this is kind of a kind of a double headwind in China, the competition and just people scaling back. It's grown its loyalty program by seven percent year over year.

[00:53:18] And I think this is a bit of a savings element as well, because I'm not a loyalty customer, but I know a few people who are. And eventually you buy enough and you get free drinks. So, I mean, maybe this is a situation for people who, you know,

[00:53:30] when they had a lot of cash, they, you know, when they had excess money, they didn't want to go through the trouble of, you know, signing up for the program and doing all that stuff.

[00:53:38] But now, you know, it might seem, you know, a bit more reasonable to do so. And they're they're getting pretty creative when it comes to new product offerings. I didn't know it did this, but it Starbucks has bubble tea now. And it was so popular

[00:53:54] when it launched that they couldn't keep up with demand and they had to scale back marketing. Really? Yeah. OK. Yeah. I mean, call me old fashioned, but I like my kind of bubble tea to be more like authentic. Yeah. Go to actual like

[00:54:09] I know there's a lot of Chinese operated bubble teas and Taiwanese operated ones, at least in Ottawa. So I like to I'm like I for I think I've mentioned on podcasts a few times I was when I was in my early 20s.

[00:54:21] I went to Taipei for like four or five months and had my fair share over there. So I do like that. But I would probably go to one of those restaurants or shops before I would overpay for a Starbucks one. Yeah, exactly.

[00:54:35] I'm still going to try it, though. I got it. Yeah, I'm going to try it. I didn't even know they had them, but I am going to try it. But one of the most notable news on Starbucks isn't really the earnings, but it's

[00:54:46] there's a hedge fund, Elliott Management. They've taken a stake in the company as an activist investor. The total position is unknown, but it is said to be large. There was some estimations anywhere from two to three billion dollars they they bought up until this quarter.

[00:55:00] Most of the talk was rumor, but the CEO stated in this quarter's conference call that it is indeed true. So they want an expansion of the Starbucks board. But to my surprise, they actually pitched an offer where the CEO could stay.

[00:55:14] In a way, this kind of makes sense. He's only been around since 2023. But there was a lot of bad press on how bad he's, you know, butchered the last couple of conference calls. So I expected maybe they wanted to see changes on that end.

[00:55:27] But that'll be interesting to see these activists, investors situations. They kind of it's kind of, you know, 50 50 on whether they work out or not, I know Parkland Fuels had one CN Rail. I think it was CN Rail had a big big activist investor that stepped in.

[00:55:44] And yeah, it's there. I mean, it happens quite a bit to struggling companies. I don't think CN Rail was struggling all that much. But but that investor there just said they could improve efficiencies. But it's going to be interesting to see.

[00:55:58] I mean, the company has a market cap, I think, of around 90 million. So sorry, 90 billion, 85 billion. So if they do have a three billion dollar stake, that's that's quite a big chunk. Mm hmm. Usually you'll get them to, you know, you'll get the board to listen. I guess.

[00:56:15] Did they get a seat? Did you mention that? Or I'm not sure. There's not there's not too much. I would imagine they would like they want with that big of a state. They want an expansion to the board.

[00:56:25] I would imagine they're going to they're going to try to step in in that regard. But yeah, I mean, a lot of in the Parkland fuel situation, the board definitely did not listen. They kind of made a big mess out of it.

[00:56:38] They yeah, that's that's a bit of a unique situation. But most of the time, these types of situations do drive a bit of changes just because these companies usually step in and buy a big chunk.

[00:56:49] And I mean, if they did buy three billion, that's a that's a pretty sizable chunk. Yeah, definitely. No, that's pretty yeah, pretty interesting. I mean, I think anything that is remotely luxury right now. And I guess Starbucks is probably more of a luxury.

[00:57:03] I know it's a small luxury, but, you know, compared to Tim Horton's even. I know where we saw like LVMH being pretty hit pretty hard in the last little while. And it's like any kind of luxury goods.

[00:57:16] It seems to be like they're having a hard time right now. So it'll be interesting to keep track of that. We'll have plenty to talk about next time we record as well. So it's definitely fun when there's a lot of earnings happening,

[00:57:30] even with the Fed this week, there was almost like too much stuff to talk about. But we'll be sure next time. Hopefully the markets are not as much in the red when when we start when we record the next one.

[00:57:41] Now that this is ending, they've gone up quite a bit. The Nasdaq is up a percent over the hour of the recording. Yeah, still down 2%, but up 1% from since we started recording. What a crazy day. Yeah, it's going to be yeah.

[00:57:57] Yeah, I think volatility will probably be the name of the game, at least for the next little while. So well, we hope you I was going to say, I hope you have a great long weekend in Ontario.

[00:58:08] It's a long weekend coming up, but people will be hearing this after. So hope you had a long, a great long weekend. And we'll be back next week with another earnings and news. And if you haven't done so, make sure you give us,

[00:58:21] you know, a five star review on Apple. Spotify really helps people find us. And you can follow both Dan and I on Twitter or X. I'm at Fiat Eisberg and Dan, you're at stock trades underscore C.A. Perfect. So thanks for listening, everyone.

[00:58:38] The Canadian Investor podcast should not be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.