The TSX Composite Index surged 17.7% year to date, but one stock refuses to recover. BCE (TSX:BCE) stock is down 15% year to date. The stock has been underperforming the market for over two years. And it is not just BCE. The entire telecom sector has underperformed since the interest rate hike began. Those who invested in BCE in April 2023 are 29% in red. Should you continue buying the stock for its 8.7% dividend yield?
Is BCE stock a buy at its current levels?
We will look at the technical indicators and fundamentals of the stock to make an informed decision.
Technical indicators
The technical indicators will tell us the current market mood. The Relative Strength Index (RSI) of BCE is 44, which means the stock is still in the sell mode. Its daily trading volume of 557,500 is roughly 18-20% of its average trading volume of 2.98 million shares. It hints that there is not much activity in the stock as investors are just not interested.
The RSI looks at the last 14-day stock price to tell you which side trading activity is higher. An RSI below 30 means the stock is oversold, and above 70 means overbought.
If you compare its RSI with smaller telcos like Cogeco Communications (RSI of 69) and Quebecor (RSI of 66), you get the idea that the market prefers smaller telcos to the incumbents.
Warren Buffett warned against the herd mentality: buying stocks that everyone is buying too late can leave you with losses. The stock trading momentum of Cogeco and Quebecor shows that investors are bullish on telecoms. Strong earnings by BCE and another dividend hike in January 2025 could move the herd to BCE as it moved the herd to Telus today.
If BCE posts better-than-expected results in the upcoming third-quarter earnings on November 7, the stock could pick up momentum. And when it does, the stock price could appreciate 10-12%. Even if the stock price doesn’t surge, you could consider buying it for dividends.
Fundamentals of BCE
BCE’s fundamentals are stressed as it is undergoing restructuring. However, the telco showed a glimpse of future growth in the second-quarter earnings as it reported a 52% year-over-year jump in net profit.
The company’s 4,500 job cuts added a one-time severance pay at the start of the year. A 1% decrease in interest rate could bring $26 million in interest savings for the telco. The Bank of Canada has cut the rate by 1.25%, and more rate cuts are in the cards.
BCE’s 111% dividend-payout ratio in 2023 and 108% in 2022 raised concerns among investors about the sustainability of dividends. These ratios are way beyond its target range of 65-75%. Many feared that BCE might slash its dividends. Hence, they priced in their fears in the stock price.
However, BCE’s restructuring and rate cuts could revive net profit and free cash flow because its revenue is growing. The 2024 payout ratio might be above 100%. In the worst-case scenario, the company might pause its dividend growth for a year or two. When dividend growth resumes, it will make up for the no-growth years with double-digit growth.
Should you buy BCE stock for its dividends?
Circling back to our original question, should you consider buying the stock for its dividend? An 8.7% yield is too attractive a deal to ignore, given that the next best yield offered by its peers is 7%. Other telcos have a yield below 5%. If you invest a lump sum amount now, you can lock in a high dividend.
A $15,000 investment in BCE could earn you $327.18 in the fourth quarter dividend. A similar investment in Telus could earn you $259 in the fourth-quarter dividend. If you are looking for immediate payouts, you could consider buying BCE for its dividends.
