Why it’s Time to Break Up With This Overrated Dividend Darling Right Now

BCE Inc. (TSX:BCE)(NYSE:BCE) stock is a dividend star. A falling star. Here’s why investors should avoid it.

| More on:
The Motley Fool

BCE Inc. (TSX:BCE)(NYSE:BCE) is one such market-darling that investors are having a tough time breaking up with. Despite falling ~14% from glory (all-time highs), the stock is still quite expensive at 17.73 times trailing earnings.

I’ve been bearish on BCE for quite some time, and although the stock seems fairly valued compared to historical average valuation metrics, BCE is going to find it tough to grow, partially because of its massive size, but mostly because the Canadian government is slated to push for more competition in the Canadian wireless scene. That means that BCE may face hurdles (along with its Big Three peers) while a new wireless entrant (whose name I shall not speak) will be granted privileges at future Spectra Energy Partners’ auctions and various other advantages courtesy of the Government of Canada.

On the fixed-line side of the business, which accounts for ~60% of total revenues, there’s fierce competition on the east coast. Moreover, BCE is overexposed to more depreciating assets than that of its smaller and more agile peers. BCE owns a remarkable number of landline and satellite television assets, which appear to be going the way of the Dodo Bird. Over the next few years, as 5G gets rolled out, BCE (and its peers), will experience a rapid rate of asset depreciation thanks to technological advances.

Looking ahead, BCE is going to need to open its wallet big time in order to continue to build on its 5G and fibre assets. Unfortunately, the rising rate environment means that borrowing costs are rising. And this, along with increased competition and potential regulatory hurdles thrown into the mix, means that BCE remains severely overvalued despite seemingly “cheap” valuation metrics.

BCE is a gigantic ship that’s going to be ridiculously hard to turn around, and although wireless growth remains strong, I don’t believe it’s indicative of a longer-term trend. In fact, I think peak subscribers are a more likely scenario than continued subscriber growth momentum.

Bottom line

The fat 5.54% dividend yield seems attractive to conservative income investors, but don’t be fooled! The stock isn’t cheap enough when you consider the huge headwinds that will likely have an insidious effect on top-line results moving forward.

With this in mind, I think the stock deserves to be much cheaper, and I’d encourage investors to avoid the stock until the dividend yield is at least 6.5%. If you can’t have meaningful growth in a tough environment, you might as well have a large upfront yield.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Dividend Stocks

calculate and analyze stock
Dividend Stocks

2 Top TSX Stocks to Put on Your TFSA Buy List

TFSA investors are searching for undervalued TSX stocks to buy that have the potential to deliver big gains in 2022. …

Read more »

Payday ringed on a calendar
Dividend Stocks

Get Unbelievable Monthly Income With High-Yield Dividend Stocks

The only thing better than a dividend stock is a stock that pays dividends every month. For people who live …

Read more »

gas station, convenience store, gas pumps
Dividend Stocks

1 Key Catalyst Investors in Couche-Tard Stock Need to Watch

One of the top value stocks on the TSX, Alimentation Couche-Tard (TSX:ATD) has been a strong performer over the past year. …

Read more »

Value for money
Dividend Stocks

2 Top Value Stocks I’m Looking to Buy Right Now

Value investing is a lot more than just grabbing stocks that look inexpensive. The shares of an organization in permanent …

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

RRSP Investors: 2 Top Canadian Dividend Stocks to Buy for Total Returns

Canadian savers are searching for good TSX stocks to buy inside their self-directed RRSP that pay reliable dividends and can …

Read more »

Cogs turning against each other
Dividend Stocks

2 Dividend Stocks That Could Stabilize Your TFSA During a Market Correction

A common strategy for investing during a market downturn is to allocate a greater proportion of your portfolio towards dividend …

Read more »

Close up shot of senior couple holding hand. Loving couple sitting together and holding hands. Focus on hands.
Dividend Stocks

3 Top Passive-Income Stocks for Canadian Pensioners

Canadian retirees are searching for quality dividend stocks to buy insider their TFSA to generate reliable and growing passive income. …

Read more »

Dividend Stocks

2 Top Dividend Stocks to Buy Today

Dividend investing is one of the best approaches to stock market investing with a long-term view. Allocating a significant portion of …

Read more »