BCE (TSX:BCE) now provides a dividend yield of 9%. The drop in the share price to a low not seen in more than a decade has investors wondering if the dividend is safe. Contrarians are trying to decide if the stock is undervalued.
BCE stock
BCE trades near $43 per share at the time of writing. The stock hasn’t been this low since 2013 and is way off the $74 the share price reached in 2022 before the Bank of Canada started to aggressively raise interest rates.
BCE spends billions of dollars every year to expand and upgrade its mobile and wireline networks. The company uses debt to fund part of the capital program, so higher borrowing costs will cut into profits and can reduce cash that is available for dividend payments.
The Bank of Canada recently cut its interest rate by 0.25% and more reductions are expected later this year and through the end of 2025. This will help BCE reduce debt expenses and should provide support for the dividend going forward.
Media woes
BCE’s media group has struggled with declining advertising revenues on its television and radio platforms. Management sold or closed dozens of radio stations over the past year and reduced television programming to trim costs. BCE also announced job cuts of around 6,000 positions to adjust to the changing market conditions.
Digital revenues are growing in the media business, but ongoing challenges are expected for the broader division. BCE recently filed an injunction to try to stop Rogers from being able to offer Warner Bros. Discovery programming in Canada for two years after Rogers secured a deal for the licensing rights of several programs beginning in January 2025. BCE previously had the rights to the content and claims there is a breach of non-compete provisions in its contract. The situation could provide an additional headwind for BCE until it is resolved.
Financial outlook
BCE saw operating revenue increase by 2.1% in 2023 compared to the previous year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also increased by 2.1%. Free cash flow rose 2.5%. Considering the difficulties in the market, the results were solid.
BCE provided 2024 guidance that expects revenue to be flat or slightly higher than last year. Adjusted EBITDA is forecast to be higher by 1.5% to 4.5%. Free cash flow will dip by 3% to 11%. Higher interest payments and a jump in severance costs will impact free cash flow in 2024, but the situation should improve next year.
Dividends
BCE raised the dividend by 3.1% for 2024. This is smaller than the average 5% annual increase investors received in the previous 15 years. However, the fact that the board is comfortable providing an increase suggests the management team has confidence in the revenue outlook for the company.
Should you buy BCE stock now?
At the current share price, the dividend provides a 9.25% yield. This could be a signal from the market that investors anticipate a cut to the payout. No dividend is 100% safe, so investors need to keep the risk in mind when evaluating the stock. If BCE were to reduce the dividend, the share price would likely take a meaningful hit.
Based on the 2024 financial guidance and the anticipation of lower expenses in 2025, the dividend should be fine in the near term. If revenue comes in lower than anticipated, investors might not see a dividend increase for the next couple of years.
Caution is warranted, but contrarian investors who think the dividend is safe might want to start nibbling on BCE at this level. A 9% return pays you well to wait for a recovery. If interest rates decline steadily through 2025, the stock could catch a new tailwind.
