Over the last decade, BCE (TSX:BCE) stock has delivered total returns that were similar to that of the Canadian stock market but with more income. For instance, the stock yields about 7%, while the market yields approximately 3.3%.
BCE and XIU Total Return Level data by YCharts
Many investors, including retirees, hold BCE stock for its rich dividend. Under a rising interest rate cycle, the high-yield stock is trading at a relatively low price point compared to its 10-year trading range. As a large telecom company, it has struggled with growth. For example, its 2022 adjusted earnings per share (EPS) is 5.3% higher than in 2012. If you annualize the growth rate, it comes out to approximately 0.7% per year, which doesn’t even cover inflation!
This makes it incredible that BCE has continued hiking its dividend over the years. Its 10-year dividend-growth rate is 5.2%. The math doesn’t add up because its EPS growth was much lower in the period. In fact, its 2022 payout ratio was stretched to close to 110% of adjusted earnings.
BCE’s recent results
BCE reported three quarters of results so far this year. Year to date (YTD), it increased its operating revenue by 2.6% to $18.20 billion. Its operating costs in the period rose 3.8%, leading to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a cash flow proxy, rising 1.1% to $7.85 billion. Notably, year over year, the adjusted EBITDA margin compressed to 43.1% versus 43.8% in the prior-year period. The capital intensity of 19.5% was similar to last year’s YTD level.
Year to date, the large telecom’s free cash flow also declined 31% to $1,855 million, primarily due to lower cash flows from operating activities. Additionally, its YTD payout ratio was almost 148% of free cash flow.
Is BCE stock’s dividend safe?
At writing, BCE stock offers a massive dividend yield of 7.14%. It is a Canadian Dividend Aristocrat that has increased its dividend for 14 consecutive years. However, its recent payout ratios of over 100% based on adjusted earnings and free cash flow suggest its dividend is unsustainable and could be in danger.
That said, management could pull some levers in the short term if it chooses to keep its dividend safe. At the end of the third quarter, BCE had $4.5 billion of available liquidity, including $569 million in cash. In comparison, it paid out roughly $3.62 billion in dividends over the trailing 12 months.
After extensive capital investments of approximately $14 billion since 2020, lower investments could bring its free cash flow generation higher over the next few years. So, a rebound in free cash flow could make its dividend safer.
Should you buy, hold, or sell BCE stock?
Management highlighted that BCE has the “lowest net debt leverage ratio [of 3.5 times] among national peers” and that it has a “manageable debt maturity schedule in 2024” with a “weighted average annual after-tax cost of public debt of 2.98% with an average term to maturity of 12.6 years.” BCE’s S&P credit rating of BBB+ is also the highest among the big three Canadian telecoms.
At $54.20 per share at writing, the recent analyst consensus 12-month price target of $58.17 according to TMX indicates the stock is fairly valued. Given that there are better-valued stocks out there with safer dividends and higher risk-adjusted returns, BCE stock is, at best, a “hold.”
