BCE (TSX:BCE) shares have remained stagnant or lower in the last several years. And yet, the Dividend Aristocrat remains a top choice of dividend income seekers. The company recently increased its dividend by 3% during the last earnings report. But, should it have done that?
In short, no. So let’s get into why, and why investors would want to see a dividend cut in the future.
About BCE stock
First off, let’s look at BCE as a company. The company is one of Canada’s largest telecommunications companies, and grew significantly over the last few decades. BCE’s core business encompasses telecommunications services, including wireless and wireline voice and data communications, internet services, and television broadcasting. The company operates under several brands, including Bell Canada, Bell Mobility, Bell Aliant, and Bell Media.
The company also is a significant player in the wireless and wireline industries, as well as owning some of the largest media and entertainment conglomerates. However, there have been recent changes that have affected the company in the last few years.
The pandemic had several effects on BCE stock. With the widespread adoption of remote work, online learning, and virtual communication during the pandemic, there was a surge in demand for telecommunications services, including high-speed internet and mobile data. BCE experienced increased usage of its network infrastructure as people relied more on digital connectivity for work, education, and entertainment. Yet this rolled back after inflation and interest rates caused Canadians to cut back.
Hurt by rising rates
The rollback in investment as well as higher interest rates have seriously hurt BCE stock. When interest rates go up, it becomes more expensive for BCE to borrow money through new bonds or loans. This can impact their ability to invest in capital expenditures or acquisitions.
Higher interest rates can lead to a slowdown in the overall economy, potentially impacting consumer spending on telecommunication services offered by BCE. And this seems to have been the case for BCE. The company continues to increase its debts, with higher interest rates meaning higher payments.
And yet, there is a clear answer. And that’s the company’s dividend.
Be worried
Look, I get it. We all want passive income. But the problem with BCE stock is the company’s finances cannot support a dividend this high. Historically, investors have been happy with a dividend yield at around 5% or 6%. And yet these days you’re at 8.85%!
Granted, that looks great on the surface. Except for the fact that the company’s payout ratio remains at an incredibly high 169.7%. This means the company cannot cover the dividend and is using all its returns to pay investors to hold the stock.
It also means not using that cash to pay down its debts. The stock now has a debt-to-equity ratio (D/E) at 176%. So it would take far more stock than the company has on hand to pay down all debts.
Bottom line
BCE stock needs to cut its dividend. The cash could then be used to pay down its debts. Not all at once, but certainly over time. Cuts in the workforce haven’t been enough. And investors are likely to be happy once again with a 5% or 6% dividend. So even if the stock cuts it by a third, it would be an excellent move by management.
