There has been a lot of investor concern over the relative safety of BCE’s dividend, and somewhat rightfully so, especially considering its 30% price decline over the past year. But, in this blog post we want to take some time to carefully review some of BCE’s key metrics and examine just how safe its dividend is.

At a high level, capital spending in the telecom sector is high, and growth is low. Investors have been worrying about high interest rates and there are competing securities with no risk (GICs) that offer high yields. BCE’s stock price has come under pressure alongside a high interest rate environment, and operating in an industry with high leverage and capital intensity. BCE’s growth has decelerated, volume growth consumes a large amount of capital, while pricing power is quite limited in the industry and competition is intensifying. With that said, the industry in Canada remains an oligopoly with little real competition, and largely, we do not believe BCE’s dividend is at any real risk in the medium term.

Let’s take a look at some of BCE’s key ratios and fundamentals.

Historical Dividend Yield and Payments

In the black line we show its dividend yield, at an impressive 8.9% yield, which is the main concern for investors – how sustainable is this yield? The blue bars show its consistency in raising dividend payments over the years, and the blue area graph in the bottom panel shows its price, which has been declining since 2022, resulting in the meteoric rise in its dividend yield.

Valuation is Reflecting Current Dividend Sustainability Worries

The above graph shows its current valuations, at a 14.9X forward earnings multiple, below its 20-year historical average, indicating that the dividend payment worries are likely priced in. In the middle panel we see its sales growth rates, minimal but still positive, and in the bottom panel we see its margins gradually declining, leading to concerns that its profits cannot sustain its dividend payments.

Can Cash Flows Sustain its Dividend Payments?

Now on to the sustainability of its dividend yield. In the above graph, we demonstrate two key metrics. The top bar graph demonstrates BCE’s Net Debt/EBITDA ratio, an indicator that measures the level of total debt (less cash) divided by its EBITDA. It is essentially a measure of a company’s leverage and determines how many years it would take to pay back its debt if net debt and EBITDA are held constant. A ratio of 3.5X is generally considered to be the maximum an investor should feel comfortable with, while this also varies from company to company.

The second metric we outline is BCE’s trailing twelve-month free cash flow less dividend payments. Essentially, the higher the number the better – it means that BCE is more able to service dividend payments using free cash flows. We can see that this metric declined materially in 2023, leading to concerns of its dividend safety from investors, however, we are beginning to see an improvement.

Key Takeaways

In the sections above, we can see why there are concerns over the viability of its dividend payments – debt levels are high, sales growth is minimal, and margins are shrinking. But, the good news is that its sales growth while low, is still positive, and its free cash flows have been improving. Given its rebound in free cash flow, low valuations, and depressed sentiment levels, we feel this is a name where investors should temper expectations for gains, but dividends should be secure with the possibility for some growth as well. We also believe that lower interest rates can help this name over time. With a lot of worry already priced into the name, and BCE operating in an oligopoly, we are not overly concerned by its dividend sustainability and feel that it can be accumulated for income-focused investors. 

 Unlock the Power of Informed Investing with 5i Research!

DIY investing doesn't have to mean going it alone. At 5i Research, we're your trusted partner in navigating the stock market. Our platform offers comprehensive stock and market research, empowering you to make smart investment decisions. 

• Investor Q&A: Have burning questions? Get answers from our team of experts and fellow investors in our dedicated Q&A section.
• Research Reports: With over 60 meticulously researched Canadian stocks, our reports offer in-depth analysis, giving you the confidence to invest wisely. 
• Model Portfolios, Alerts, Forums, Portfolio Tracking, and Much More...

Research for Today, Invest for Tomorrow.

Twitter: @5iChris