What’s Actually Going On With BCE’s Dividend?

BCE (TSX:BCE) stock might be further along with its turnaround, but the dividend might not be in hyper-growth mode just yet.

Key Points
  • BCE’s big dividend cut a year ago looks like the right reset, and the new payout now seems more sustainable as the company works through debt and ongoing telecom pressure.
  • The next question is growth: BCE is betting on AI data centres as a new engine, but the heavy spending and uncertain payoff make it a patience-required, fairly valued 5.53% yield play.

BCE (TSX: BCE) broke many hearts when it decided to cut its quarterly dividend by more than half just over one year ago. Amid intense industry headwinds and balance sheet pressures, it felt like it was just a matter of time before the payout would be slashed drastically. As it turned out, BCE’s decision to cut or rip the band-aid off sooner rather than later was the right move.

Telus (TSX: T), another firm that followed in BCE’s footsteps just over a year later, ultimately followed a similar playbook with a dividend reduction of close to 55%. Indeed, the yield was getting up there, in the ballpark of 12%, and the big question was not whether Telus’ dividend would stay intact, but how long it’d take before the cut would hit. Indeed, the dividend growth pause that preceded the big cut was quite the warning sign.

In my view, Telus was just delaying the inevitable, and while things have only gotten more painful for the industry in the past year, I do think that BCE is further along with its recovery, as pricing pressure, slowing population growth, and the existential threat (at least in my humble opinion) of satellite connectivity, which might upend broadband in addition to mobile data.

voice-recognition-talking-to-a-smartphone

Source: Getty Images

Telecoms are under pressure: Are the dividends still reliable?

While many of the concerns surrounding BCE and its top peer, Telus, haven’t really dissipated, I do think that BCE’s new dividend is on a steady foundation. It’s just large enough to satisfy new income investors while being less of a burden as the firm looks to pay back debt and pursue other opportunities to reduce operating costs and jolt long-term growth again. Any way you look at it, I do think that BCE’s earlier dividend reset and ongoing efforts to turn the tide bode better for the stock and the trajectory of free cash flows moving forward.

Of course, whether or not BCE will be able to grow that dividend quickly again remains the big question. Much of it, in my view, hinges on how well the data centre plans go. The data centre buildout is going at full speed on both sides of the border. But while Bell AI Fabric seems like it could be the answer to what ails the telecoms, it’s going to be a more expensive pursuit that could lead to near-term pain.

As to whether there will be long-term gain that’s worth the upfront investment, we’ll just have to wait and see. There’s a lot of skepticism surrounding high AI data centre CapEx (capital expenditures) these days, and with some worried about an AI bubble burst and underutilized data centres across the continent, questions linger as to whether BCE is getting into another business that acts as a drain on cash flows, with a giant question mark surrounding the impact on cash flows further down the line.

The bottom line

It’s nice to think that AI data centres could become BCE’s next big growth engine, helping bring big growth back to the dividend. But, in my view, I think the name is fairly valued with a decent yield of 5.5% and a growth wildcard that might work out for those willing to be patient with the name.

In my view, sacrificing the oversized payout to go after a generational growth opportunity in AI infrastructure is the right call. When telecom industry headwinds aren’t so quick to dissipate, sometimes a sudden pivot is needed, even if it means losing fans over the near term.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Middle aged man drinks coffee
Dividend Stocks

TFSA or RRSP? Your Tax Rate Could Change the Answer

Your current and future tax rates can help determine whether a TFSA or RRSP deserves your next retirement contribution.

Read more »

dividend stocks are a good way to earn passive income
Dividend Stocks

How I’d Structure My TFSA With $14,000 for Constant Income

I would split $14,000 across three stocks for income.

Read more »

oil pump jack under night sky
Dividend Stocks

Forget GICs: This Dividend Stock Pays You 4% Monthly

GIC rates look thin after taxes. This top Canadian dividend stock pays you each month, yields about 4%, and covers…

Read more »

infrastructure like highways enables economic growth
Dividend Stocks

3 Savvy Ways Canadians Can Invest in the Country’s Infrastructure Boom

Find out how Prime Minister Carney's plans for Canadian infrastructure can benefit investors and revitalize key industries.

Read more »

ways to boost income
Dividend Stocks

$10,000 in These Stocks Could Be All It Takes to Build Real Monthly Income

A $10,000 investment split between two monthly-paying Canadian REITs could currently generate about $50 in passive income every month.

Read more »

Concept of rent, search, purchase real estate, REIT
Dividend Stocks

Looking for TFSA Income? This 7.6% Dividend Stock Should Snag Your Attention

Firm Capital Property Trust's monthly distribution recently showed improved safety. Here's why the 7.6% yield belongs in your TFSA.

Read more »

A plant grows from coins.
Dividend Stocks

Are These Still the Best Dividend Stocks in Canada?

With GICs yielding over 4% and their business models shifting, are BCE, Enbridge, and TD Bank still among Canada's top…

Read more »

shopper carries paper bags with purchases
Dividend Stocks

$1,000 in This Stock Could Be Paying You for the Rest of Your Life

A $1,000 investment won't create instant passive income, but Fortis's 52-year dividend-growth streak gives it decades-long potential.

Read more »