TORONTO — Canada’s broadband communications companies are facing growing pressure to raise dividends, as a prolonged period of very low interest rates is causing investors to seek refuge from declining bond yields and to move into higher-yielding assets, according to a new report from Moody’s Investors Service.
“Share prices for dividend-paying broadband companies in Canada have become more sensitive to dividend yields, similarly to bonds, and less sensitive to earnings,” said Bill Wolfe, a senior vice-president at Moody’s Canada Inc., in a news release. “But with dividends growing faster than EBITDA and other spending remaining constant, after-dividend cash flow is eroding, along with financial flexibility and credit quality.”
According to the Moody’s report, “Credit Quality Will Erode as Dividends Grow Faster Than Cash Flow”, the pressure to increase dividends is occurring even as the Canadian broadband sector matures and growth slows due to heightened competition, resulting from widening adoption of high-speed unified IP communications platforms.
The ability for Canadian broadband companies to grow revenue and EBITDA is becoming increasingly difficult, which means that dividends can rise only as a result of financial compensation, such as eroding free cash flow or cutting capital expenditures, Moody’s said in its news release.
Broadband company management teams may feel compelled to make acquisitions or to take on more leverage, given the low interest rate environment, to alleviate their cash flow woes and support dividend growth, Moody’s added.
