With a market cap of $41.4 billion, BCE (TSX:BCE) is one of the largest companies in Canada. It has internet, wireless, wireline, and media operations across Canada.
BCE has been a good dividend growth stock, but times have changed
The company has an excellent record of growing its dividend per share for 16 consecutive years. However, with the stock down -16% in 2024 and -23% in the past 52 weeks, its dividend yield has soared to 8.9%!
Today, BCE trades with its highest yield in over 10 years. For context, its average dividend yield over the decade has been 5.6%. Even during the pandemic, it didn’t rise over 7.2%.
Why is BCE’s dividend so high?
Certainly, the yield and valuation could look very attractive at these levels. However, it is not as simple as that. Whenever a dividend yield hits over 8%, investors need to be cautious. The market vacates the stock, its price drops, and the yield rises to compensate for elevated financial or business risks (or both).
A stretched balance sheet
In this case, BCE is facing both. Firstly, its balance sheet has weakened in the past few years. BCE has taken on a tonne of debt to finance its expansive infrastructure build-out.
Since 2018, net debt has increased 50% to $36 billion. Net debt to earnings before interest, tax, depreciation, and amortization (EBITDA) has risen from 2.7 times in 2018 to 4.1 times today.
So far, its pricey infrastructure investments have failed to yield any benefit to shareholders. Over the past five years, earnings per share have fallen 26% from $3.10 to $2.28. While operating cash flow has risen 6% in that period, free cash flow per share has declined 3%.
The point is that BCE’s ever-growing balance sheet (and the risk that entails with more debt) has not created better results for shareholders. In fact, in an elevated rate environment, it is quite the opposite. BCE’s interest expense is up 30% over 2023. That is eating away at BCE’s earnings.
Rising competition is challenging pricing
Unfortunately, the competitive environment is not helping either. The Rogers-Shaw merger and the rise of Quebecor (through its acquisition of Freedom Mobile) is putting pressure on cellular pricing. Likewise, government pressure to create more competition is making the regulatory framework increasingly challenging for big players like BCE.
The dividend is not sustainable right now
This is where concerns about its dividend start to rise. BCE’s net income payout ratio is 170%. Its free cash flow payout ratio (based on the excess cash generated from the business) is 109%. That means it is paying more dividends than it can afford to. Its current dividend is fuelled by debt and equity dilution.
Certainly, BCE’s management believes things will turnaround soon. It is planning to pull back its infrastructure spend. Likewise, it has been cutting staff and money-losing assets to improve the bottom line.
Unfortunately, the cost-cutting is coming too late. Other telecom peers moved much faster. The market continues to worry about the rising business risks as it continues to push down the stock.
There could be more downside, especially if the dividend gets cut
It is uncertain when BCE’s free cash flow will actually match or exceed the dividend. As a result, a dividend cut is possible, especially if its business doesn’t start turning around soon.
Until that happens, the big dividend yield is not enough to make me a shareholder. Dividend lovers should be just as cautious with BCE stock. You might want to look at these stocks instead…..
