Anytime a stock is trading more than 50% below its previous high, it’s easy to assume something is wrong with the business, especially when it comes to dividend stocks that have also cut their payouts.
That kind of drop also typically comes with bad headlines, weak sentiment, and a long list of reasons why investors are staying away. And in a lot of cases, that caution can be justified.
But sometimes, a big decline says more about what already happened than what’s coming next.
Because the real question isn’t just why a stock fell. It’s whether the underlying business is actually in worse shape today, or if the market is still reacting to old news.
That’s exactly the situation right now with BCE (TSX: BCE). The shares are still down roughly 55% from their previous highs and trade in the mid-$30 range.
That discount might get a lot of attention, but it doesn’t tell the full story because it’s not just about what happened last year when BCE cut its dividend; it’s about what the business looks like today.
And considering the dividend stock still generates billions in annual cash flow, remains one of the largest telecom and infrastructure businesses in the country, and offers a yield of roughly 5%, it’s certainly a stock you do not want to ignore.
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The reset is already behind it
Before the sell-off, the issue was fairly straightforward, and the market was widely expecting a dividend cut. As BCE and its competitors poured billions into building out 5G and fibre infrastructure, there was far less cash available to return to investors. That led to several years where BCE paid out well over 100% of its free cash flow, which simply wasn’t sustainable.
And while that level of spending was never going to last forever, it also pushed BCE’s debt higher at the same time interest rates were rising.
So, management addressed this by cutting the dividend by more than 50%. And while that was a blow for existing investors, it also fixed the company’s biggest problem.
A reliable dividend stock you can buy now
With BCE in a much stronger financial position and with a lot more flexibility, the turnaround is already on full display.
For example, in its most recent quarter, BCE reported revenue of $6.2 billion, up 4% year over year. Meanwhile, its adjusted earnings per share came in at $0.63, beating expectations, while free cash flow reached $804 million.
Furthermore, after the reset, the annual payout sits at roughly $1.75, and this time it’s actually supported by the company’s cash flow. Over the last 12 months, its payout ratio of free cash flow has fallen below 75%, and BCE aims to continue growing its free cash flow until the payout ratio falls to about 50%, which management believes it can achieve by next year.
And that’s a huge reason why BCE is still one of the best dividend stocks to buy now.
It’s not a turnaround in the traditional sense. It’s still a massive, cash-generating infrastructure business. The assets are still there, the demand is still there, and now the financial structure is in a much better place.
So, BCE isn’t the same stock it was before the cut. The biggest risk, an unsustainable dividend, has already been addressed. And now what’s left is a company offering a roughly 5.1% yield that appears far more reliable than it did a year ago.
That’s why, even after a difficult stretch, BCE is still one of the most reliable dividend stocks Canadian investors can own for the long haul.
