Is a Dividend Cut Coming for This 8.5 Percent-Yielding Stock?

BCE stock’s dividend yield rose to 8.5% from years of dividend increases and a fallen stock price. Will it cut its dividend?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It’s unbelievable that BCE (TSX:BCE) stock now offers a dividend yield of 8.5%! Not too, too long ago, the big Canadian telecom stock peaked at approximately $73 per share in April 2022. At that time, the stock yielded 5%.

Big dividend yields are warning signs that are flashing for a potential dividend cut. Is a dividend cut coming for BCE stock? It’s certainly hard to swallow the possible idea of a dividend cut for a perceived blue-chip stock like BCE.

The large-cap stock has increased its dividend every year since 2009. Its 10-year dividend-growth rate is around 5%, while its latest dividend increase was about 3% in February. Investors like dividend hikes because they get a growing passive income. However, slowing dividend growth could be another warning sign.

The big telecom is a capital-intensive business. It borrows to make long-term investments for the business. So, it has a big portion of debt on its balance sheet. In the last reported quarter, it had $52.2 billion of debt on its balance sheet, including $32.2 billion of long-term debt. Its debt-to-equity and debt-to-asset ratios were 2.6 times and 72%, respectively. Interest expense in the trailing 12 months (TTM) was $1.6 billion.

Compare that to back in 2021 when BCE had $43.8 billion of debt on its balance sheet, including $27 billion of long-term debt. Back then, its debt-to-equity and debt-to-asset ratios were 1.9 times and 66%, respectively. And its interest expense was $1.1 billion for that year.

Created with Highcharts 11.4.3Bce PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

The higher interest expense can be explained by higher debt levels and higher interest rates. Since interest rates began rising in 2022, stocks with underlying businesses that have large debt levels have fallen because new debt or refinanced debt will result in higher interest costs and, therefore, growth will slow. It was a rapid increase with the Bank of Canada raising the policy interest rate from 0.25% to 5%. That said, the policy interest rate seems to have stabilized at 5% for now.

Will BCE cut its dividend?

Investors are likely most concerned about the sustainability of BCE’s dividend, as many investors buy and hold BCE for dividend income. First, BCE is a slow-growth business. From 2011 to 2021, it increased its diluted earnings per share by only 3.8%, which is a compound annual growth rate (CAGR) of 0.38%. Its adjusted earnings per share increased by 1.9%, or a CAGR of 0.19%. Even in this period of low interest rates, the telecom experienced low growth.

Second, BCE has been raising its dividend at a faster pace than earnings. In the period, it increased its dividend by almost 72%, or at a CAGR of nearly 5.6%. So, based on earnings, its payout ratio has been overextended since 2020. Its 2023 payout ratio was about 121% based on adjusted earnings.

Its dividend has better coverage from cash flow. From one perspective, last year, 60% of BCE’s operating cash flow went into capital spending, which is a long-term investment needed for the business. This percentage aligned with the 63% of operating cash flow used for capital spending from 2019 to 2022. From another perspective, one could also say that BCE borrowed to make those long-term investments. In this case, 46% of its operating cash flow went into paying out dividends last year.

Some investors use the stricter free cash flow metric to determine dividend safety. Free cash flow is operating cash flow minus capital spending. In this case, the payout ratio was 121% in the TTM.

At the end of the day, it’s anyone’s guess if BCE will cut its dividend. Based on its track record of dividend payments, management seems keen on keeping the dividend. However, given the slow-growth business, higher interest expense, and high payout ratios, it may be in the company’s best interest to reduce the dividend to more sustainable levels.

Just Released! 5 Stocks Under $50 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $50 a share.

Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.

Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

A meter measures energy use.
Dividend Stocks

Here’s How to Earn $500/Month From Fortis Stock, Even With an Interest Rate Freeze

Fortis stock is a strong investment and can continue to be one even with interest rates remaining high.

Read more »

Dividend Stocks

Real Estate Exposure Without Property Ownership: 3 Canadian REITs Worth Considering

These top Canadian REITs are trading off their highs and offer compelling dividend yields, making them three of the best…

Read more »

An investor uses a tablet
Dividend Stocks

Tariff Trade War: A Few Solid Stocks to Buy Now

These stocks have reliable operations, offer attractive dividends and are trading off their highs, making them three of the best…

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

How I’d Invest $50,000 of TFSA Cash as Canada-US Trade Uncertainty Grows

If you're looking to avoid volatility and still make gains in your TFSA, here's a low-volatility way to do it.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

Is Telus Stock a Buy for Its Dividend Yield?

Telus stock is trading near its nine-year low. Is it a stock to buy on the dip? If yes, does…

Read more »

Concept of multiple streams of income
Dividend Stocks

Why I’d Consider These 5 Essential Canadian Dividend Stocks for a Robust Income Portfolio

These dividend stocks are critical pieces of the Canadian economy and would serve a long-term income portfolio well.

Read more »

money goes up and down in balance
Dividend Stocks

Invest $25,000 in These Dividend Stocks to Combat Currency Fluctations

These dividend stocks could turn a $25,000 investment into a huge income stream – and help battle ongoing volatility.

Read more »

exchange traded funds
Dividend Stocks

I’d Invest $12,000 in These 3 High-Yield Dividend ETFs for Passive Income

Market turbulence? Sleep easy with these three high-yield dividend ETFs that provide steady monthly income while you wait for recovery.

Read more »