Is BCE Stock a Buy for its 8.6% Dividend Yield?

BCE (TSX:BCE), one of Canada’s leading telecommunications companies, has caught the eye of many dividend stock investors with its impressive 8.6% dividend yield. This attractive payout has risen significantly from its historical average of around 5%, making it an intriguing option for passive-income-focused investors. But is BCE stock a good buy? Let’s dive into the details.

BCE stock and the allure of high dividends

For long-term investors, BCE’s current dividend yield is undoubtedly tempting. If you plan to hold the stock for a decade or more, you could potentially enjoy substantial income from these quarterly payments. This is especially appealing if BCE manages to improve its financial situation while maintaining its generous payout.

However, it’s important to look beyond just the dividend yield. In the past three years, BCE’s total return (which includes both dividends and stock price changes) has actually been negative 13%. This means that despite receiving those attractive dividend payments, investors have lost money overall due to the declining stock price.

BCE data by YCharts

Financial challenges and opportunities

BCE faces some significant hurdles. The company has taken on considerable debt to invest in its fibre network infrastructure. Outstanding debt has increased from $18.7 billion by the end of 2019 to more than $39.5 billion by June this year. At the same time, the company is dealing with intense competition in the Canadian telecommunications market, which has led to lower prices and squeezed profit margins.

These factors have put pressure on BCE’s free cash flow — the money left over after covering necessary capital expenditures. The company is currently paying out more in dividends than it’s generating in free cash flow, with a projected free cash flow payout rate of 124.5% for 2024. This isn’t sustainable in the long run.

However, BCE’s management isn’t sitting idle. It has taken several steps to improve the company’s financial health:

1. Cost-cutting measures, including a significant number of recent layoffs
2. Selling non-core assets to reduce debt, such as the recent sale of Northwestel for $1 billion
3. Transforming Bell Media from a traditional broadcaster to a digital media company, which is showing promising results with a 32% increase in digital advertising revenues

There’s also hope that as BCE winds down its aggressive fibre build-outs, capital expenditures will decrease, potentially improving cash flow in the coming years.

Recent performance and future outlook

Despite the challenges, BCE’s latest quarterly results show some positive signs. The company returned to service revenue growth after two quarters of declines, thanks to its fibre strategy and success in attracting premium wireless subscribers. Free cash flow also grew by 8%, benefiting from higher EBITDA (earnings before interest, taxes, depreciation, and amortization) and lower capital expenditures.

BCE’s management remains confident in the company’s future. It highlights the strong liquidity position of $5 billion and a well-structured debt maturity schedule with an average term of about 13 years.

That said, the company suffered recent credit ratings downgrades partly due to its generous dividend growth policy. Its cost of debt may increase in the future to exert more pressure for a dividend cut.

Is BCE stock a buy?

Whether BCE stock is a good buy depends on your investment goals and risk tolerance. Here are some key considerations:

For income-focused investors: If you’re primarily interested in receiving regular, high-yield dividend payments and don’t mind potential fluctuations in the stock price, BCE could be an attractive option. The company has a long history of paying dividends and has shown commitment to maintaining its payout.

For total-return investors: If you’re looking for both income and capital appreciation, you might want to be more cautious. While the dividend yield is attractive, the declining stock price has offset these gains in recent years. There’s potential for improvement if BCE’s financial situation stabilizes, but it’s not guaranteed.

Investor takeaway

BCE stock offers a tempting dividend yield, but it comes with some risks. The company faces challenges in a competitive market and has a high debt load. However, management is taking steps to address these issues, and there are signs of improvement in some areas.

For investors willing to accept some uncertainty in exchange for high dividend income, BCE stock could be worth considering.