Valued at a market cap of $30 billion, BCE (TSX:BCE) is among the largest companies in Canada. Shares of the telecom giant are currently down 56% from all-time highs, which means BCE has grossly underperformed the broader markets in the past decade. Investors remain worried about BCE’s financial health and growth prospects as BCE wrestles with multiple headwinds.
In the last 10 years, BCE’s long-term debt has more than doubled, increasing its interest expense from $909 million in 2015 to $1.71 billion in 2024. Moreover, the company’s adjusted earnings have fallen significantly in this period, which might even lead to dividend cuts.
Today, BCE pays shareholders an annual dividend of $3.99 per share, indicating a forward yield of over 12%. Let’s see if the telecom stock can rebound in 2025 and deliver outsized gains to long-term shareholders.
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Will BCE stock reduce its dividend?
BCE’s dividend strategy has come under intense scrutiny as the telecom heavyweight struggles with an alarmingly high payout ratio that threatens its financial flexibility. It recently declared a quarterly dividend of $0.9975 per common share while stating that its dividend payout ratio ballooned to 125% of free cash flow in 2024, far exceeding its 65-75% target range.
This unsustainable payout ratio is $1.9 billion above the upper limit of BCE’s policy range. BCE explained that its free cash flow declined by $256 million year over year as operating cash flow fell by $958 million. Notably, it reduced capital expenditures by $684 million in 2024.
BCE amended its dividend-reinvestment plan (DRIP) to issue new shares from the treasury at a 2% discount. It enables the company to retain cash that would otherwise be paid as dividends. The January 2025 enrollment reached 34%, preserving $308 million in cash.
Looking ahead, BCE projects a lower payout ratio for 2025, supported by $500 million in capital expenditure reductions.
Is the TSX dividend stock a good buy?
BCE’s financial position has deteriorated in recent years. It ended 2024 with a net debt leverage ratio of 3.81 times, up from 3.48 times in 2023. The rising debt burden was driven by aggressive capital expenditures, spectrum purchases, and strategic acquisitions that have strained BCE’s balance sheet.
BCE recently issued US$2.25 billion in junior subordinated notes to address these concerns. In 2025, BCE plans to use these proceeds to reduce senior debt and begin decreasing its leverage.
Despite these challenges, BCE maintains investment-grade credit ratings (BBB high from DBRS, Baa2 from Moody’s, and BBB from S&P) and an available liquidity position of $4.5 billion. Moreover, BCE’s publicly issued debt securities have an average term of approximately 12.8 years with an average after-tax cost of 3.2%.
BCE will need to demonstrate meaningful progress in reducing its debt leverage while balancing shareholder returns, as five-year total shareholder returns have underperformed the broader S&P/TSX Composite Index.
Management’s efforts to monetize non-core assets and optimize capital allocation will be crucial for restoring investor confidence in the telecom giant’s financial stability.
Priced at 11 times forward earnings, the TSX dividend stock trades at a 10% discount to consensus price target estimates.
