BCE (TSX: BCE) is one of Canada’s big telecom stocks. Until recently, income-seeking investors saw it as one of the best options on the market. That changed when BCE’s dividend was cut.
That dividend was one of the main reasons why investors continued to own the stock. The company offered a large payout, regular annual increases, and a business many investors viewed as defensive.
So then, what exactly is going on with BCE’s dividend right now?
Typically, BCE funds those upgrades through a mix of cash flow and debt.
Source: Getty Images
What happened to BCE?
Telecoms like BCE are capital-intensive businesses. They require massive amounts of funding to maintain and upgrade their networks. Typically, those upgrades are financed through a mix of cash flow and debt.
When interest rates began to rise several years ago, it made funding those upgrades more expensive. This put pressure on the stock, which was also reeling from investors rotating out of telecoms and into growth stocks.
The result is a stock that is now down about 50% over the trailing five-year period. And as the stock price fell, the dividend yield, which is based on the price of the stock, swelled into double-digit territory.
This led BCE to engage in aggressive cost-cutting efforts, which included reducing expenses across the business, winding down some media assets, and making deep staffing cuts.
Included as part of those cuts was freezing the annual increase to BCE’s dividend and then slashing it.
BCE’s dividend reset changed the story
BCE’s dividend cut was significant. The company reduced its quarterly dividend from $0.99 per share to $0.44 per share. That brought the annualized dividend down from $3.99 per share to $1.75 per share.
That reset is the key reason BCE’s dividend looks different today than it did just a year ago.
For long-time shareholders, that was painful. The company had built part of its reputation around that payout, so a cut changed the way investors looked at the stock.
Perhaps more importantly, BCE’s dividend had grown unsustainable. In addition to that massive payment, BCE was also dealing with high capital spending, spiralling debt, and rising interest costs.
Fortunately, the dividend is now more sustainable. As of the time of writing, BCE offers a 5.5% yield, which is still an attractive dividend. For some dividend investors, that may make BCE worthy of another look.
The lower payout gives BCE more room to pay down debt and invest in its network. And with interest rates ceasing their upward trajectory, it allows BCE a better chance to stabilize after the last few difficult years.
BCE still has work to do
BCE’s dividend is in a much better place now, but the company still has larger problems to solve. Telecoms are capital-intensive businesses, and BCE still needs that investment to upgrade its wireless and fibre networks.
That investment is also needed to keep BCE competitive with its peers.
Fortunately, BCE is making progress. The company’s acquisition of Ziply Fiber is beginning to show promise. In the most recent quarter, Internet net subscriber activations grew 3.2% when compared to the prior period.
BCE also saw an increase in free cash flow to $804 million in the most recent quarter, reflecting a 0.8% increase over the prior period.
Is BCE stock a buy for investors?
BCE isn’t the automatic buy-and-forget dividend-growth pick it was once known for. BCE’s dividend is different from what it used to be. The company is also different, focused on growth and recovery.
That difference makes BCE’s dividend appealing for investors who can handle some risk as a small part of a larger, well-diversified portfolio.
