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BCE (TSX: BCE) has long been a favorite among Canadian dividend investors, prized for its stability and reliable payouts. However, with its stock plummeting by 23% in the past year, concerns are growing regarding the sustainability of its investment appeal, particularly in comparison to other TSX dividend stocks.
In just one year, BCE’s dividend yield has surged from 6.3% to an impressive 8.5%, well above its 10-year mean of 5.59%. While such a high dividend yield might seem enticing, investors should exercise caution.
Beware of High Dividend Yields
A stock should not be deemed a sound investment solely because of its high dividend yield. In fact, a remarkably high yield should serve as a red flag.
When a stock's dividend yield exceeds 7%, it typically indicates underlying risks that the market is pricing in. These risks prompt the stock price to fall, necessitating a higher dividend yield to compensate investors for the heightened uncertainty.
BCE is grappling with a multitude of challenges that contribute to its elevated dividend yield.
Challenges Facing BCE
1. Debt Burden: BCE has embarked on an aggressive infrastructure expansion plan to remain competitive in the telecommunications market. However, this initiative has led to a significant increase in debt, with net debt rising by 35% since 2019 to $34 billion. The surge in debt has strained the balance sheet, with net debt-to-EBITDA ratio ballooning from five times to 7.2 times.
2. Earnings Pressure: Despite substantial investments, BCE's earnings growth has not kept pace with its expanding debt. EBITDA has only seen a modest increase of 2.2% since 2019, while earnings per share have declined by 44%. Rising interest expenses further exacerbate the earnings pressure, with interest costs surging by 37.5% over the same period.
3. Competitive Landscape: The telecommunications sector faces intensified competition, exacerbated by the recent Rogers-Shaw merger. Pricing pressures on cellular plans and weakness in BCE's media division have further dampened earnings prospects.
4. Regulatory Challenges: Government regulations and legislation pose additional hurdles for telecom companies like BCE, diminishing profitability and heightening competition.
Unsustainable Dividend
BCE's current dividend payout is unsustainable given its recent revenue and earnings weakness. The company's free cash flow payout ratio stands at 111%, indicating that it is paying out more in dividends than it generates in spare cash. This excess payout is supported only by leveraging, which is an unsustainable practice.
Given the challenging dynamics and unsustainable dividend policy, BCE is a stock that most investors, particularly retirees seeking income, should steer clear of at present. Despite its discounted valuation and lofty dividend yield, the risks outweigh the potential rewards at this juncture.
