Shares of BCE (TSX:BCE) have fallen 20% in a month and now have a huge 10% dividend yield. But Motley Fool analyst Iain Butler doesn’t think BCE stock is a smart buy today. He explains why in this conversation with analyst Nick Sciple.
Prefer to read? There’s a transcript below.
Transcript
Nick Sciple: I’m Motley Fool Canada senior analyst Nick Sciple, and this is the Five-Minute Major, here to make you a smarter investor in about five minutes.
Today, we’re discussing BCE’s post-earnings sell-off and frankly uncertain future. My guest today is Motley Fool Canada Chief Investment Officer Iain Butler. Iain, thanks for joining me once again.
Iain Butler: Great to be here, Nick, as always.
What’s going on with BCE stock?
Nick: As I alluded to in the intro, BCE shares are not having a great month, down more than 20% following a disappointing earnings report and really a head scratching acquisition. Iain, what do investors need to know about BCE and the company’s stock today?
Iain: Yeah, I think you used the right word in the intro there, “uncertain.” And this is a company that frankly isn’t supposed to be uncertain. This is sort of a stalwart company that’s been in the Canadian market forever and people have leaned on for decades as sort of a rock, a steady rock in their portfolios, rightly or wrongly, given the performance over a number of years. But I think what jumps off the page when I think of BCE — and what I think a lot of people are seeing right now — is the dividend yield.
BCE’s dividend yield
It is north of 10%. It has never even been close to 10% in BCE’s entire history.
The long-term average is about 4.7%. So we’re more than double the long-term average and frankly, on dividend yield alone, if that dividend is indeed sustainable, this could be a market-beating idea, especially if the market grows comfortable with the sustainability of the dividend.
It’s bound to decline from 10% if that becomes the case. So you’ve got a big yield locked in if you buy the stock now. And potential price appreciation, too, just as comfort grows.
However, I don’t think the market has this one wrong at all. And sort of a quick and dirty way to check a dividend is by gauging or by comparing a company’s free cash flow generation to its dividend commitments. So over the past 12 months, BCE has generated $3.5 billion in free cash flow. Its dividend obligations amounted to $3.6 billion, so it was not able to cover it on free cash flow alone over the past 12 months. And a similar situation has occurred in recent years as well. 2023: Same idea, $3.4 billion in free cash flow. $3.5 billion in dividend obligations, and the same goes for 2022 and 2021. So the company has at least announced that they are no longer planning on increasing the dividend on an annual basis for the foreseeable future anyway. However, these free cash flow numbers compared to dividend obligations certainly do not inspire confidence and sort of reinforces what the market is seeing as well.
BCE’s stock price
Nick: Hey, Iain, you talk about that high dividend yield. The other side of a high dividend yield is the stock price, and stock price is the lowest it’s been for BCE in a decade. What has to happen for this company to turn itself around? And more importantly for shareholders, do you think the company can actually do it?
Iain: Totally. And I mean, not only is the stock at the lowest price in a decade, I was recently reminded that about 17 years ago in 2007, a leveraged buyout led by Ontario Teachers Pension Plan was on the table to acquire BCE for $42.75 a share.
So today, I think the stock has a $37 handle on it. And so it’s below that bid from 17 years ago. So not great if you’re a BCE shareholder. There have been dividend payments over the past 17 years, but absolutely zero capital appreciation.
BCE’s financials
There’s a balance sheet problem here. And there is a growth problem. In 2007, when that bid was made, BCE generated about $17 billion in revenue. Over the past 12 months, the company generated $24 billion in revenue. So up a bit, but I mean, that’s low single digit annualized growth over a very long period of time and really not anything anybody should get very excited about. It hardly would have beat inflation.
Over that same period of time, though, interest expense has about doubled. And the dividend payout has gone from — or the dividend obligation — from $1.1 billion in 2007 to $3.6 billion over the past 12 months. So we’ve got growing commitments, debt and dividends, and really nothing going on in the top line. So it just seems to be they’re flushing money down the toilet.
Management and insider buying
And it’s not whether or not I think it can turn around. Does management think it can turn around? And I think one great, quick and dirty way of checking that is to look at what the CEO thinks. The CEO has been in the role since June 2020.
His annual compensation package in 2023 was just over $13 million. That’s pretty well-heeled. So somebody with some cash in the bank showing confidence in their own company? Mmmm … on November 13, the CEO bought just over 5,200 shares. That adds to his position of just over 35,000 shares, which amounts to a value of about $1.3 million. And that’s about his annual salary.
Is BCE stock a good buy?
So again. Nothing about this inspires confidence in me, and I think it’s a pretty easy pass just to watch let go by.
Nick: Yeah, for folks looking for dividend income, there’s probably other places to look, maybe we can talk about those potential opportunities in future videos. Iain, thanks for joining me once again for the latest edition of the Five-Minute Major. We’ll see everybody next time. Fool on.
