BCE (TSX:BCE) seems to be falling more and more in the last few months, with many investors seeking out returns simply afraid of the stock. Yet those who are interested in a dividend may be wondering whether now is the time to jump in, especially with an 8.7% dividend yield on the line.
So, is it worth the risk for the high dividend? Let’s take a look at just how safe that dividend is and what the next few years might look like for BCE stock.
What happened?
Before we get into the future, let’s take a look at the past. Shares of BCE stock have taken a beaten for a few reasons. During February, BCE stock reported a decline in profits and announced a 9% workforce reduction. This led many investors to be concerned over the future growth prospects of the company.
Furthermore, there continues to also be pressure on the company form the Canadian Radio-Television and Telecommunications Commission (CRTC). The regulatory pressure comes as the company has been told to share its infrastructure with competitors to create more competition in the market. To which BCE stock said it would be cutting back its infrastructure building.
And its competitors have certainly been busy, with mergers and acquisitions in the telecom sector creating more pressure for BCE stock. Then there are the basic issues such as rising interest rates and a broader market selloff. All in all, BCE stock has gone through a lot in the last year, with shares now down 25% in that time.
The next few years
There are, of course, potential positives and negatives that could happen for BCE stock over the next few years. Some of the positives would likely include improved earnings if BCE stock can be successful in its restructuring and cost efficiencies after the workforce reduction. If profitability can improve, this could attract investors back in. Add in a lower interest rate and that still strong dividend, and it could look like a huge deal among stocks.
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But there are negatives to consider. The CRTC could continue to tighten its regulations, putting pressure on BCE stock with little way of expanding without sharing its infrastructure. And that would likely create a limit on the ability to raise prices and expand services, and increase its competition in the process.
What it really comes down to for this article, however, is the dividend. So, how safe is it exactly?
Is the dividend safe?
What we really want to know is if you’re buying this stock for its dividend, is there likely to be a cut? There are a few metrics Canadian investors can consider, so let’s look at some of them for BCE stock.
First, there’s the payout ratio, which is the percentage of a company’s earnings paid out as dividends. With a 170% payout ratio, that means it’s dipping into reserves to keep up its dividend, making it dicey.
Then there’s free cash flow, to see how BCE stock will generate cash after accounting for its operating expenses and capital expenditures. As of its most recent full-year earnings report, free cash flow was at $2.593 billion, just a 0.27% increase from 2022 levels. That could also be an issue, given that it’s not making much more than it was before.
Then there’s debt, with the stock’s debt-to-equity ratio at 176%. Again, that’s not good, as it means it would take 176% of its equity to pay off all debts. So, while BCE stock may have increased its dividend by 3.1% recently, I’d be far more worried about a cut in the future.
