In a recent column, you announced that you “sold” BCE Inc. (BCE) from your model portfolio. Do you still own the stock personally, and do you think the dividend will be cut?
No, I don’t own BCE personally, having sold it recently. Yes, I do think it is likely the dividend will be cut, although when, and by how much, are open questions.
Analysts have become increasingly vocal about the need for BCE to reduce its dividend to strengthen its balance sheet and free up capital for growth. In my experience, when analysts start calling for a cut, it’s usually only a matter of time before it happens.
When BCE announced on Nov. 4 that it agreed to acquire U.S.-based Ziply Fiber for about $5-billion, funded largely by the sale of its stake in Maple Leaf Sports & Entertainment, BCE said it “intends to maintain its annual common share dividend at the current level of $3.99 per share during the financial year ending December 31, 2025.”
Further, BCE said it “intends to pause dividend growth until BCE’s dividend payout and net debt leverage ratios are tracking towards our target policy ranges, subject to review annually by the BCE board of directors.”
The fact that BCE said nothing about maintaining the current dividend rate beyond the end of 2025 indicates to me that a cut may be on the table. Some analysts say this would be the right move for the company.
“While cutting the dividend could cause some pressure on the stock in the short term, we believe it is the best strategy to position the company to have a more flexible balance sheet to undertake additional [merger and acquisition] transactions in the U.S. if deemed needed,” Maher Yaghi, an analyst with Scotia Capital, said in a note.
With wireless competition intensifying in Canada as carriers slash prices, reducing the dividend would also “provide the company with additional capital if competitive intensity in Canada remains elevated,” Mr. Yaghi said.
Given BCE’s pledge to maintain its dividend through 2025, analysts don’t expect a reduction immediately. But longer-term, maintaining the dividend while reaching BCE’s payout ratio and debt leverage targets could prove to be challenging.
“We now assume a 25-per-cent dividend cut in 2026, to approximately $3.00″ per share, TD Cowen analyst Vince Valentini said in a note this week. That would represent a payout ratio of about 93 per cent based on TD Cowen’s estimate of BCE’s free cash flow in 2026 and a yield of about 7.9 per cent based on the current share price.
BCE’s shares closed Friday at $37.94 and are yielding about 10.5 per cent based on the current dividend rate. Such a high yield indicates that investors are skeptical that the dividend will be maintained at current levels.
What are you doing with the proceeds of your BCE sale?
Dumping the 115 BCE shares in my model portfolio netted $4,478.10 in cash, on top of the $2,000 or so that was already there from dividends that have been accumulating. (View the model portfolio online)
When I look at the model portfolio’s holdings, there’s nothing that jumps out at me as a screaming buy right now. That’s perhaps not surprising, given that the S&P/TSX Composite Index has surged about 23 per cent this year.
So, rather than put the cash into a single stock, I’m going to spread the money around.
First, I’ve decided to purchase another 15 shares of Toronto-Dominion Bank (TD), bringing the total to 100 shares. Even as TD reported disappointing fourth-quarter results this week, sending its stock down, the bank raised its dividend by about 3 per cent. It will take some time, but I believe TD’s stock will eventually recover from the bank’s U.S. money laundering fiasco that led to billions of dollars in fines. In the meantime, I’ll get “paid to wait” with an attractive dividend yield of about 5.7 per cent as of Friday morning.
Second, because I consider grocery-anchored Choice Properties Real Estate Investment Trust (CHP.UN) to be one of the most stable REITs in Canada, I’ve added 100 units, for a total of 600. Choice also sports an attractive yield of about 5.4 per cent.
For my third purchase, I’ve added 20 shares of Enbridge Inc. (ENB), for a total of 120 shares. This week, the pipeline operator hiked its dividend by 3 per cent, marking the 30th consecutive annual increase for the company, which now yields about 6.1 per cent. And I believe there are more increases to come.
Finally, I’ve added 55 units of the iShares S&P/TSX Composite Index ETF (XIU), for a total of 370 units. All of these purchases were completed at Thursday’s closing prices, and together they consumed $5,875.90 of cash.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.