BCE (TSX: BCE) offers a very high dividend yield. Investors who own dividend stocks for passive income are wondering if BCE stock is now undervalued and good to buy for a self-directed portfolio.
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BCE share price
BCE trades near $40 per share at the time of writing. The stock is at a new low not seen in more than a decade.
At the time of writing, BCE stock is down nearly 10% on the day. Investors are reacting to BCE’s announcement that it has agreed to expand into the United States through a $5 billion deal to buy Ziply, an American fibre internet provider with operations in the Pacific Northwest, including Washington, Idaho, Oregon, and Montana.
BCE expects the deal to close in the second half of 2025. Proceeds from BCE’s recently announced sale of its stake in Maple Leaf Sports and Entertainment (MLSE) will be used to cover most of the purchase price. BCE says the new acquisition will be accretive on closing and provides a first step to ramp up growth in the United States market, where only 50% of properties are served by fibre optic lines compared to 75% in Canada.
Investors will not get a dividend increase for 2025. BCE is also implementing a 2% discount on shares purchased using dividends under a new dividend-reinvestment plan. Investors who buy BCE stock at the current level can get a 9.9% dividend yield.
Risks
BCE carries a lot of debt on its balance sheet. Higher interest rates in the past couple of years drove up debt expenses. This puts pressure on earnings and cash that is available to pay dividends or reduce the debt load. Investors had hoped that BCE would use the proceeds from the sale of the MLSE stake to shore up the balance sheet. The surprise acquisition of Ziply now brings concerns about BCE’s ability to maintain the dividend back to the forefront. This is largely why the stock is down 10% on the news.
In Canada, growth is going to be difficult in the next few years. Price wars on mobile and internet services are putting pressure on margins. At the same time, the government’s decision to scale back immigration will cut into demand for new communication services from the new arrivals. Regulatory uncertainty is also an issue with a change in government looking likely in the next year.
Time to buy, sell, or hold BCE stock?
The market reaction suggests that investors are concerned that the dividend will have to be cut. Any time a dividend yield reaches 10%, this is certainly a risk. BCE might decide to monetize other assets to raise cash and reduce the debt load. If that occurs in the near term, the stock could recover some ground as it would provide more reassurance to the market.
Dividend growth could be on the shelf for more than just 2025. As such, investors who buy the stock at the current level need to feel confident the distribution is safe and that the new growth strategy will succeed in the coming years.
Contrarian investors might want to start nibbling on the correction. Everyone else should probably wait to see where the share price stabilizes before backing up the dividend truck.
