BCE (TSX: BCE) stock has been in headwinds for over two years and is trading closer to its 10-year low. Even fundamental investors tend to doubt the company’s growth when things are going south. With BCE, the point in question is the stability of its $3.99 dividend per share. In this article, we will analyze the telco’s potential to pay dividends to understand if the current dip in stock price is an opportunity to lock in high yield or a warning of a dividend cut.
BCE is a dividend stock
BCE is a dividend stock and doesn’t give much capital appreciation in the long term. It earns cash from subscriptions and invests that money to build or upgrade its telecom network, repay debts, and give dividends to shareholders.
Management has been growing dividends generously after the 2008 dividend cut when it paid dividends only twice instead of four times a year. That was the year when interest rates peaked and stayed there for a long time, enough to force BCE to reduce its dividend-paying frequency. When the Bank of Canada slashed rates in 2009, the stock revived and more than doubled its dividend next year.
Can the 2008-2009 history repeat itself? The odds are it may. However, BCE is holding tight and doing everything to keep the dividend intact. After paying out 113% of its free cash flow as dividends in 2023, there were expectations that the telco wouldn’t grow its dividend this year. However, its 3% dividend growth in 2024 took the market by surprise.
How safe is BCE’s current dividend?
So far, a quarter is over, and there is no change in the 2024 guidance. BCE is undergoing a major restructuring. It is selling its radio stations and Best Buy Canada stores, which could reduce its revenue. Its expense is also increasing due to a one-time severance pay of $234 million from the resulting job cuts from restructuring. BCE’s management anticipates free cash flow to fall by 3-11% in 2024, which means the dividend payout ratio could grow past 113% this year.
BCE has already priced in the above impact in its 2024 guidance. While it can hold on to this situation for a year, it may not be able to sustain it longer. All expectations are on significant interest rate cuts from the Bank of Canada.
In 2008-2009, the Bank of Canada slashed interest rates from 4% to 0.25% in less than a year. Such a sharp dip is unlikely now. However, a 50 to 100 basis point rate cut is possible. Moreover, the current debt situation is not as bad as in 2009. The restructuring could reduce costs and improve profits and free cash flow. I am expecting a pause in dividend growth but not a cut.
Even in the worst-case scenario, if BCE decides to slash dividends, it could probably make up for the cut in the coming years with accelerated growth. BCE is riding the 5G opportunity wherein cloud services and digitization could open new revenue streams. Also, a proliferation of connected devices could increase the subscriber base.
Should you invest in the stock for its dividend?
After looking at BCE’s dividend capabilities, should you invest in the stock for dividends? The stock has slipped 37% from its all-time high in April. There could be a rebound, and the stock price could ride the recovery rally if interest rate cuts begin. You should invest in the stock to enjoy this recovery rally in the short term.
As for dividends, be prepared for a stable dividend or a slash in dividend payments for the short term, followed by healthy dividend growth in the long term. A fundamental investor with a long-term investment horizon could consider investing in BCE for dividend and capital appreciation.
