For years, BCE (TSX:BCE) was one of the best dividend stocks in Canada. The telecom sector in general was one of the most attractive industries for income investors. These were the kind of businesses you could buy, hold for decades, and collect reliable cash flow without having to worry much. And BCE was at the top of the list.
That made sense. Telecom companies own long-life infrastructure, generate consistent recurring revenue, and benefit from steady population growth. Furthermore, demand for mobile service, internet data, streaming, and cloud connectivity has only continued to grow over time.
However, telecom isn’t as low-maintenance as it used to be. It’s actually one of the most capital-intensive and competitive sectors in the market today.
The core infrastructure may last a long time, but new technologies can make existing equipment obsolete faster than you’d think. That means telecom stocks like BCE are constantly racing to reinvest, whether it’s building out fibre-to-the-home or expanding their 5G coverage.
What happened to BCE stock?
Over the last few years, BCE and its peers have invested billions into these upgrades. The thinking was that these investments would fuel growth for decades. But in the short term, that meant cash flow was being squeezed.
Several telecoms, including BCE stock, saw their free cash flow fall below the level needed to support their growing dividend payments. In other words, their payout ratios ballooned well over 100%. And that’s not a situation you can stay in forever.
Still, most investors assumed that the lean years would eventually give way to better margins, lighter capital expenditure budgets, and a return to free cash flow growth.
However, BCE also continued to make more acquisitions, which may have been strategic but also caused it to take on additional debt.
Furthermore, BCE continued to expand even while dealing with rising interest rates and inflationary pressures on operations.
And to make matters worse, the telecom market was also dealing with competitive pressure from smaller players. At times, the industry has lacked pricing discipline, which has put downward pressure on margins.
So, when BCE stock slashed its dividend in early May by a whopping 56% most investors were already expecting it. The stock price had declined significantly, and the dividend yield was sitting at more than 13%, a clear red flag that investors were expecting a significant move from management.
Eventually, BCE ultimately decided to cut the dividend from $3.99 annually to just $1.75, which was a necessary move to strengthen the balance sheet and the future of the business.
Is BCE a safe investment now with its reduced dividend?
With BCE’s significant capital expenditures still ongoing, albeit beginning to slow down slightly, analysts are now estimating that BCE stock will generate free cash flow of roughly $3.33 billion this year, which translates to approximately $3.62 per share in free cash flow.
Therefore, without the cut to the dividend, BCE stock would have seen its payout ratio well over 100% once again.
However, because its annual dividend is just $1.75 per share now, BCE’s payout ratio will be much more sustainable. That not only ensures the dividend remains reliable for investors, but it also helps BCE improve the strength of its balance sheet, which gives it more flexibility for new growth opportunities over the long haul.
Furthermore, analysts continue to expect BCE’s capital expenditure requirements to decline over the next few years, which would significantly increase its free cash flow. So, although the stock just trimmed its dividend this year, it wouldn’t be surprising to start seeing BCE stock resume its annual dividend increases as early as next year.
Therefore, if you’ve got cash you’re looking to invest, and want a solid dividend stock that can earn you a decent yield, protect your capital and offer steady and consistent growth potential over the long haul, then BCE stock is certainly one of the best to consider.
