It’s a good time to revisit BCE (TSX:BCE) stock, as it appears to be a low-hanging sweet fruit that’s ripe for picking. The big Canadian telecom stock has declined meaningfully by about 13% year to date. As a result of the market correction, the stock now offers an appetizing dividend yield of almost 7.5%! This is a high yield even for the big dividend stock.
Much of the drop in the stock has to do with higher interest rates, which are a dampener of growth for businesses. It impacts companies like big telecoms that have sizeable debts on their balance sheets.
In BCE’s case, it has a debt-to-equity ratio of 2.3 times and a debt-to-asset ratio of close to 70%. In comparison, at the end of 2019, its debt-to-equity and debt-to-assets ratios were about 1.8 times and 64%, respectively. Its trailing 12-month interest expense was $200 million (or almost 17%) higher than in 2019.
Recent results and 2023 expectation
BCE reported its third-quarter results in November, which means investors can expect it to report its fourth-quarter and full-year 2023 results in February. In the third quarter, the telecom only witnessed marginal operating revenue growth of 0.9% year over year to $6.1 billion. As well, its adjusted earnings dropped 7.5% to $741 million. On a more positive note, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a cash flow proxy, climbed 3.1% to under $2.7 billion.
The year-to-date results were generally better. Operating revenue climbed 2.6% to $18.2
billion, adjusted earnings per share fell 7.2% to $2.45, and the adjusted EBITDA rose 1.1% to $7.85 billion.
BCE maintained its 2023 outlook: revenue growth of 1-5%, adjusted EBITDA growth of 2-5%, adjusted earnings per share decline of 3-7%, and free cash flow growth of 2-10%. The company has invested quite substantially in its network over the past couple of years. A reduction in capital investments would result in a bump in the free cash flow, which should better protect its dividend over the next couple of years.
Is BCE stock’s dividend safe?
BCE’s dividend is not entirely covered by earnings this year. Specifically, its payout ratio is estimated to be about 122% of adjusted earnings and 112% of free cash flow! Interestingly, though, it has been a persistent dividend grower. In the past couple of years, when I thought it might, at best, maintain its dividend, it continued to increase it by about 5% per year, which aligns with its 10-year dividend-growth rate of 5.2%. For the record, it has increased its common stock dividend for about 14 consecutive years.
Management seems committed to the dividend, but I wouldn’t say it’s 100% safe because of the high payout ratios. Surely, there are safer dividends out there. Cautious investors can explore dividend stocks with yields of about 4.7% to 6.3%, which is roughly 1.5 to two times the Canadian stock market yield.
Valuation
At the recent price of $51.80 per share, BCE stock is relatively cheap compared to where it traded over the past few years. The 12-month analyst consensus price target represents a discount of approximately 9%. A catalyst for a higher stock price would be the Bank of Canada announcing interest rate cuts, which will likely occur in an economic recession.
In conclusion, if BCE keeps its dividend safe, investors won’t need a lot of growth in the stock to get a decent return. The dividend already provides returns of about 7.5% per year.
