Don’t Get Hung Up Over BCE’s 10% Dividend Yield

We wrote a blog in February called “Dial Back on Canadian Telco Exposure”. At the time, BCE’s stock was trading at $50.83. It’s since dropped to $37.90. Because of the collapse in the stock price, the dividend yield has climbed from 7.9% to almost 10.5%, meaning that $10,000 invested in BCE today would return $1,050 in dividend income each year.

But will the dividend get cut?

Often, the market overreacts on both sides of the pendulum, swinging from euphoria in good times to overly glum during bad times. Whenever a stock accompanies a double-digit yield, however, it indicates that the market is bracing for a dividend cut.

Telcos in Canada shouldn’t trade at a hefty valuation. After all, they always seem to be butting heads with Ottawa. Customers hate cell phone companies for the rates they charge. Political parties now often include a campaign pledge to reduce rates and foster competition. If BCE didn’t have enough enemies in the House of Commons already, their decision to cut 4800 jobs earlier this year (while simultaneously hiking the dividend) wasn’t met with wild fanfare.

It’s difficult to see a catalyst for BCE, other than the potential that bottom-fishing contrarians like us step in to buy the beaten-up stock. Its fundamentals are unlikely to improve any time soon. Ottawa reduced Canada’s immigration target from 500,000 per year to 395,000 in 2025, 380,000 in 2026 and 365,000 in 2027. Trudeau is unlikely to be around this time next year, but let’s leave that for another blog. Nevertheless, we expect immigration targets to follow this downward trend irrespective of the governing party, which means fewer newcomers to Canada needing a cell phone or internet connection. 

BCE targets a dividend payout of 65-75% of its free cash flow. A company’s free cash flow is simply the cash left over after making its big capital investments. However, BCE has been paying out their entire free cash flow on the dividend for the last three years (2021: 107%, 2022: 109%, 2023: 113%). We expect that to hit almost 130% in 2024 and remain above 105% in 2025 as well.

The board of BCE would be loath to cut its dividend. This is a stock owned by retirees who depend on the income. Following the sale of BCE’s 37.5% ownership in Maple Leaf Sports & Entertainment, the company that owns the Leafs and the Raptors — which we would argue was their crown jewel — and their subsequent purchase of the U.S. internet fiber company Ziply, management pledged to leave the dividend alone at $3.99/year until the end of 2025. We would have preferred to see them pay down debt or buy back a whack of shares, particularly because the stock traded at the same price it did a decade earlier when the acquisition of Ziply was announced.

Telcos abroad have cut their dividends before, despite having a shareholder base that craves income. The usual culprit is often the debt payments that impede the company’s flexibility. The dividend was cut at AT&T in 2022; Vodafone in 2019; Frontier Communications in 2017; Telefonica in 2012; and Sprint in 2008.

Rather than take on BCE’s risk profile, we believe Telus is a much safer investment opportunity. Afterall, Telus pays a 7% dividend yield, offering two-thirds of the income that BCE provides. However, there’s no risk of Telus cutting their dividend. In fact, now that the fiber buildout across Canada is near complete, Telus’s CEO all but confirmed on a recent conference call that it would continue to hike their dividend by 7-10% each year for the medium term.

While we don’t think BCE will cut its dividend in the next 12 months, we think management may change its mind if the stock price hasn’t recovered by the end of 2025.

-written by Jeff Pollock