I’m no chaser of ridiculously high dividend yields, especially in an environment where risk-free yields are still somewhat generous. That said, when it comes to telecom titan BCE (TSX:BCE), which now commands a yield comfortably above the 8.5% level, I can’t help but keep watch of the name as management does its best to turn the tides in a rather rough environment for the nation’s top telecoms. With BCE shares down almost 37% from its short-lived early-2022 highs, questions linger as to how the nearly $42 billion juggernaut can get back on its two feet again.
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BCE stock’s yield is now above 8.5%!
Undoubtedly, whenever yields eclipse the 8% mark, you could be walking into a value trap and setting yourself up for disappointment once a dividend cut is dealt out. When it comes to BCE, I think the odds of a dividend reduction are relatively low over the medium term, especially following recent budget cuts and continued rate cuts from the Bank of Canada (they delivered a huge 50-basis-point cut just last week).
While BCE’s dividend is incredibly bountiful, I have concerns about the heavy debt load, which may become less manageable over time. Unless the company can get earnings back on the growth track, the dividend’s footing stands to get a bit wobbly every year that goes by. That said, if things go right for the telecom titan, dip-buyers who step in here may just be able to “lock in” that massive 8.6% dividend yield alongside any capital gains that could accompany a march toward the stock’s prior all-time highs.
BCE stock: The falling knife that could be hard to catch
Of course, those who attempted to catch a bottom in the falling knife have been knicked thus far. As investors lose confidence in the firm and its ability to turn the ship around, however, I must say I’m a fan of the risk/reward trade-off, especially if the Bank of Canada continues cutting into rates aggressively.
Not only does BCE need to spend a great deal to upgrade its network, but it also has to service a significant debt load. As rates fall, the pressures could gradually lift, allowing BCE to maintain its dividend as it makes its return to growth. Additionally, I’d look for BCE’s massive restructuring effort to help shore up enough financial flexibility to stabilize the dividend while it bets big on the long-term opportunity to be had in wireless.
At the time of writing, shares of the telecom giant do not look cheap at 21.4 times trailing price to earnings (P/E). Despite the nasty plunge behind it, the stock is still far from a great value for investors hoping to score a margin of safety.
The bottom line
Only time will tell how BCE rises from its multi-year funk. Either way, conservative income investors should proceed cautiously with the name and insist on a dollar-cost averaging (DCA) approach, which entails buying the stock incrementally over time.
That way, one won’t be forced to “catch a bottom” in a stock that could easily hit new lows over the coming quarters. Either way, BCE stock stands out as a name that’s better bought on the way up than the way down unless, of course, you’re keen on scoring the colossal yield.
In any case, I think there’s a good chance BCE stock will be above $50 per share in a year from now. The tailwind of lower rates and the firm’s commitment to improving its cost structures may be enough to power the ultimate comeback.
