The telecom industry is one many investors choose to hold exposure to, for a range of reasons.
For one, companies operating in this space tend to be among the highest-yielding dividend stocks of investment quality worth considering. That’s true of BCE (TSX: BCE) and a number of other top operators in this space.
However, the Bell parent is certainly one of the top names in this sector. And with a market capitalization of more than $30 billion, it’s a key component of many Canadian investor portfolios, for good reason.
Let’s dive into what BCE’s future prospects look like and why investors continue to jump aboard this name right now.
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Dividend, dividend, dividend
Core to BCE’s investment thesis is the company’s incredibly high dividend yield of more than 11%. What’s interesting about this yield is that BCE is funding this yield despite market concerns that there may be a dividend cut risk at play. Indeed, any time a given stock provides a double-digit yield (particularly in this environment), investors have to think twice about how safe the distribution is.
I think that’s certainly a top concern for many investors. And it should be.
However, BCE’s ability to spit off cash flow somewhat alleviates these concerns. BCE produced nearly $7 billion in operating cash flow this past year. And while this amount does cover its dividend, the company’s net earnings (stagnating around zero) don’t inspire confidence from many investors.
The reality is that BCE is likely going to need to continue to fund its dividend with debt. So, with a debt hoard of more than $40 billion on its balance sheet (with around $2 billion in cash available), this is a stock that’s got some fundamental issues. That’s probably why BCE stock is down more than 30% over the past year.
Is this stock worth holding over the next five years?
There are certainly some balance sheet concerns I have with BCE. And given the company’s sky-high yield, there’s growing concern that some sort of cut could be on the horizon. Any dividend cut could be very negative for the company’s outlook, though one has to think that something of the sort is already priced in. The market is good at anticipating such scenarios, so it’s also possible that BCE stock could rally in the event of a dividend cut.
We’ll have to see what plays out here. But personally, this is one single stock I wouldn’t bet the farm on right now, given its fundamental issues. For long-term investors seeking telecom exposure, there are other better names in this sector in Canada and abroad.
The bottom line is that my five-year outlook on BCE has tilted negatively lately. Until something changes on the dividend front, that’s how I’ll have to think about this one.
