BCE (TSX:BCE) is one of the Big Three Canadian telecoms. It is often held as an income stock in diversified portfolios because of its big dividend yield. At $54.48 per share at writing, BCE stock offers a massive dividend yield of 7.1%, which is double the Canadian stock market yield.
BCE is also a Canadian Dividend Aristocrat with a track record of dividend increases. It has raised its common stock dividend for about 15 consecutive years. Its dividend has climbed at a pretty consistent rate of about 5% over the last decade. This is interesting because its earnings and cash flow have not kept pace.
As a mature business, BCE experiences slow growth. Specifically, in the past 10 years, it has increased its adjusted earnings per share by just over 6%. This equates to a growth rate of only 0.6% per year. The operating cash flow per share also increased mildly by roughly 4% in the period. This growth doesn’t even keep pace with the long-term inflation rate of 3% to 4%. In any case, it has resulted in an ever higher payout ratio. Its 2023 payout ratio is estimated to be approximately 122% of adjusted earnings.
Recent results
So far, BCE has reported three quarters of results for 2023. For the third quarter, the telecom increased its operating revenues by only 0.9% to $6.1 billion. Its adjusted net earnings fell 7.5% to $741 million, leading to an adjusted earnings per share decline of 8% to $0.81. Its adjusted EBITDA, a cash flow proxy, did a bit better by rising 3.1% to $2.7 billion. Its free cash flow was also up 17.4% to $754 million thanks partly to capital spending that was lowered by 12%.
Its year-to-date results are as follows. Operating revenue rose 2.6% to $18.2 billion, but operating costs jumped higher by 3.8% to $10.4 billion. Its adjusted earnings per share ended up falling 7.2% to $2.45. As for its adjusted EBITDA, it rose 1.1% to $7.9 billion.
Management also maintained its 2023 outlook: revenue growth of 1% to 5%, adjusted EBITDA growth of 2% to 5%, adjusted earnings per share growth of -3% to -7%, and free cash flow growth of 2% to 10%.
BCE data by YCharts
Here’s the return on $10,000 invested in BCE stock in 2023
Now, throwing in the scenario of a higher interest rate environment, the stock was pressured last year. A multiple of 10 is simple for visualization purposes. If you invested $10,000 in BCE stock a year ago, your position would only be about $9,457 today, including the dividends that you received.
BCE stock investors should focus on the dividend income generation, which should provide the bulk of the stock’s long-term returns.
A positive scenario may be a potential jump in free cash flow from lower capital spending. Afterall, the telecom averaged massive capital spending of about $5.6 billion per year over the past three years. An increase in free cash flow generation over the next few years, leading to a higher dividend, coupled with the macro factor of interest rates declining could lift the stock valuation and drive the dividend stock higher.
