BCE (TSX:BCE) is among the most popular dividend stocks on the TSX. With a market cap of $42.5 billion, BCE currently offers shareholders an annual dividend of $3.99 per share, translating to a forward yield of 8.6%.
A major reason for BCE’s elevated yield is the drawdown in share prices. In the last 12 months, shares of the telecom giant have fallen by 22%, driving the dividend yield higher. While BCE’s dividend yield might seem attractive, let’s see if it makes sense to buy the stock at the current multiple.
How did BCE perform in Q4 of 2023?
In the fourth quarter (Q4) of 2023, BCE witnessed an increase in sales and strong net additions, resulting in positive average revenue per user growth. It managed promotional offers in a disciplined way balancing growth with profitability with an improvement in product margin in the December quarter. Due to its fibre footprint, BCE grew broadband internet market share, contributing strong residential internet revenue growth of 7.1% in 2023.
Its fibre advantage and bundling capabilities enabled BCE to increase its market share in Quebec. Moreover, BCE’s media business drove top-line growth as digital revenue rose 19%, accounting for 35% of total sales, up from 29% in the year-ago period, showcasing its resiliency amid challenging advertising market conditions.
BCE now aims to increase investments in the digital space as it continues to access premier content from core partners such as Warner Bros. Discovery. The company is optimistic about gaining a share in the digital ad market in 2024 and beyond.
Is BCE’s dividend yield sustainable?
Shareholders should understand that BCE’s payout ratio has surged over 100% in recent years, which is not ideal. Typically, telecom companies have a payout ratio of less than 80%, providing them with the flexibility to reinvest in growth projects, reduce balance sheet debt, and target accretive acquisitions.
In fact, BCE’s payout ratio has risen from 105% in 2021 to 108% in 2022 and 111% in 2023. According to a report from Veritas Investment Research, BCE’s payout ratio might range between 119% and 131% in 2024.
Further, Veritas explains that the payout ratio is much higher as BCE excludes capital leases while calculating its free cash flows. Capital leases are not optional costs and are required to purchase and maintain critical assets, including cell towers and satellites. If we adjust for capital leases, BCE’s payout ratio rises to 155% in 2023, up from 115% in 2020.
BCE claimed its payout ratio will move below 100% by 2025 once it has completed capital expenditures related to its fibre expansion. Alternatively, Veritas Investment estimates the payout ratio to be over 100% if we include capital lease payments.
BCE has increased dividends by more than 5%, but investors should remain cautious, given the payout ratio is not sustainable.
The Foolish takeaway
BCE stock is priced at 15 times forward earnings, which might not seem too high. But analysts expect earnings per share to narrow by almost 5% year over year in 2024. The telecom heavyweight will need to increase its high-margin digital ad business while lowering costs to regain investor confidence.
Bay Street remains bullish and expects BCE stock to surge by more than 20% in the next 12 months.
