Financial Challenges

Chapter 7
Risk and Return on BCE Common Shares

BCE (Bell Canada Enterprises) is one of the most widely held stocks in Canada. For decades it was considered a very conservative, safe investment—a “widows and orphans” issue. It also paid cash dividends continuously. More recently, however, shareholders of BCE have seen their returns plummet. During the first half of the year 2002, the BCE share price declined by 31 percent, to $24.30 on July 26, 2002. Nortel Networks, a former BCE wholly owned subsidiary, was spun off to BCE shareholders on record on May 2, 2000. At the end of May 2000, Nortel shares traded at $79.75 each, and by the end of July 2000, they reached $109.75. However, just two years later, on July 26, 2002, Nortel shares traded at only $1.39 per share! Dividends declined as well; BCE paid less and Nortel stopped paying dividends.

BCE and Nortel are not alone. Many other blue-chip shares also suffered large declines. Likewise, dividend yields have been declining for many years. Two decades ago the dividend yield averaged almost 5 percent, but now it has dropped to less than 2 percent.

The buy-and-hold investment strategy has never been a sure thing. Large companies have been getting into financial difficulty (including bankruptcy) throughout the twentieth century. For example, Confederation Life, one of Canada’s largest insurance companies, went bankrupt in 1994.

Recent data suggest that share prices have become much more volatile and that fewer investors are following a buy-and-hold strategy. The average individual investor now holds a share for only about one year compared with about five years in 1975.

This discussion illustrates the nature of investment risk. Even the best companies face unforeseen events that can have a significant impact on the market value of their shares. It is the existence of this type of risk that causes most prudent investors to hold well-diversified portfolios (groups) of shares, rather than concentrating their investments in just a few types of shares.

This chapter defines what is meant by risk and develops various techniques for measuring and managing risk that can be used by financial decision makers, such as corporate treasurers, money managers, and securities brokers. Individual investors can also use these techniques to assess the risks associated with personal investments (e.g., Registered Retirement Savings Plans).

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